[1986] 25 TAXMANN 347 (ART)

TAX LITERATURE/TAX OBLIGATIONS

DEDUCTION OF TAX AT SOURCE FROM SALARIES AND DIVIDENDS
V. Pattabhiraman
In this article, the author outlines the obligations of persons responsible for paying salaries or dividends, to deduct tax at source. He
defines the scope of the expressions 'person responsible for paying', 'salary' and 'dividend', lists the exemptions and deductions to be taken
into consideration, and describes the statutory duties of the person deducting the tax regarding furnishing of statements/return of tax
deducted at source. The author states the deadlines to be adhered to in this connection. Certain controversial points, now settled through
judicial decisions, have been included at appropriate places - Editor
Statutory obligations
1. The two major sources of payments for which deduction of tax at source has been prescribed under the provisions of sections 192 and
194 of the Income-tax Act, 1961 ('the Act'), are salaries and dividends. The statutory obligation in this regard becomes complete only with
the furnishing of annual statements to the ITO before April 30 every year. In this article, the procedure to be followed in this regard is
explained.
Salaries
2.1 Who should deduct tax - Under section 192, the responsibility for deducting tax at source is placed on "any person responsible for
paying any income chargeable under the head 'Salaries'". Section 204(i) of the Act stipulates that the 'person responsible for paying' for this
purpose will be 'the employer himself or, if the employer is a company, the company itself, including the principal officer thereof'. In the
context of a company, the expression 'principal officer' will have the definition assigned to it in section 2(35) of the Act, viz., the secretary,
treasurer, manager, agent or any person connected with the management and administration of the company. A managing director cannot be
equated with a manager, and cannot be treated as a principal officer unless the ITO has served a notice on him, intimating his intention to
treat him as a principal officer in terms of section 2(35)(b) - ITO v. Joseph [1972] 83 ITR 362 (Ker.). An official liquidator is, however, a
principal officer of the company, despite the fact that no assets of the company are in his hands and that only ex-directors are liable for the
income-tax arrears of the company - ITO v. Official Liquidator [1977] 106 ITR 119 (AP).
2.2 Meaning of 'salary' - The Act uses the very wide expression "income chargeable under the head 'Salaries' ", and, hence, all the items
that go into the computation of income under sections 15 to 17 of the Act must be taken into account. However, certain exemptions and
deductions are permitted to be taken into account under executive instructions. The Board issues instructions to the disbursing officers
every year as soon as the Finance Act is passed, laying down the mode of compu- tation, the latest circular being No. 429 dated August 8,
1985 - [1985] 23 Taxman, Section IV, p. 164. From this circular, it will be clear that, apart from cash payments, even perquisites provided
to the employee, like free or concessional residential accommodation, conveyances provided, supply of gas, electricity or water,
educational facilities, etc., must be considered, and the value of such perquisites should also be included in 'salary' for purposes of
deduction of tax at source. The following exemptions/deductions are, however, required to be taken into account.
2.3 Exemptions - Exemptions on gratuity [section 10(10)], leave encashment [section 10(10AA)], retrenchment compensation [section
10(10B)], house rent allowance [section 10(13A)] and special allowances [section 10(14)] must be allowed. Though no specific mention
has been made in the Board's circulars, exemption on travel concession or passage money [sections 10(5) and 10(5A)] and commuted value
of pension [section 10(10A)] can also be taken into account. The exemption on house rent allowance will have to be computed in
accordance with rule 2A of the Income-tax Rules, 1962. In respect of special allowances, the Board have authorised the disbursing officers
to quantify the exempt portion and certify the quantum of actual expenditure incurred in the performance of duties - Circular No. 196 dated
March 31, 1976 - Taxmann's Direct Taxes Circulars, Vol. 1, 1985 edn., p. 929.
2.4 Deductions - Investments qualifying for deduction under section 80C of the Act must be taken into account. In case of some of the
investments that the employee makes directly, like life insurance premia, public provident fund, unit-linked insurance plan, post office CTD
and national savings certificates, the requisite particulars must be collected from the employees, and after ensuring the factual correctness
of the investments by insisting upon the employees to furnish documentary proof, the deductions can be allowed. Apart from this, the
following deductions are also to be allowed :
· Deduction towards rent paid, in respect of persons not in receipt of house rent allowance [section 80GG of the Act, read with rule 11B].
· Deduction on remuneration received in foreign currency [section 80RRA of the Act].
· Deduction to blind and physically handicapped persons [section 80U of the Act]. However, no deduction under section 80G of the Act on
donations must be taken into account. It will be up to the employee to claim the deduction before the ITO by filing a return of income.
2.5 The manner of computation and recovery of tax - The deduction of tax at source is required to be made at the time of payment of the
amount to the employee. If the employee's account is credited with the amount due, in the employer's account, no tax need be deducted
until the amount is actually paid to the employee - Pentagon Engg. (P.) Ltd. v. First ITO [1983] 5 ITD 87 (Bom.). Since salary is a
recurring monthly payment, the disbursing officers will be well advised to determine the estimated salary income for the year, work out the
tax due, and deduct it in equal monthly instalments. The rate of tax to be applied for this purpose will be the rate applicable to individuals
as laid down in the Finance Act for the relevant year. Thus, on payments made during the financial year 1986-87, the rates laid down in Part
III of the Finance Act, 1986 are applicable. If salary is paid in foreign currency, its value in rupees should be calculated at the telegraphic
transfer buying rate of such currency as on the date on which tax is required to be deducted at source [section 192(6), read with rule 26],
Section 192(3) also authorises the disbursing officer to increase or reduce the rate of deduction during the financial year in order to adjust
deficiency or excess arising out of any previous deduction.
2.6. Payment of tax to Government account - Under rule 30(1)(b )(ii) of the Rules, the sums deducted must be paid to the Government
account within one week from the date of deduction, by remitting the same to the Reserve Bank of India, or the State Bank of India, or any
of its subsidiaries, or to selected public sector banks. In special cases, the ITO may, with the prior approval of the IAC, permit an employer
to make quarterly payments on June 15, September 15, December 15 and March 15. The challan to be used for this purpose is Form No. 9
(blue colour band).
2.7 Furnishing certificate to employee - Section 203 of the Act makes it mandatory on every disbursing officer to furnish a certificate of
deduction of tax at source to the employee 'at the time of credit or payment of the sum'. This would mean that monthly certificates must be
issued especially when any employee demands it. In other cases, the issue of monthly certificates is relaxed by the Board, provided an
annual certificate is given at the end of the year. This certificate is to be given in Form No. 16, with minor variations to suit local
requirements. In this connection, standardised and comprehensive form of certificate devised by the Commissioner (Bombay) can be
advantageously adopted, since it will help not only the employee but also the assessing officers - Taxmann's Direct Taxes Circulars, Vol. 1,
1985 edn., pp. 1244-1246.
2.8 Furnishing monthly return - Under rule 32, every disbursing officer must send a monthly return of tax deducted at source in Form No.
21 to the ITO having jurisdiction over the employees. The Commissioner has the discretion under rule 34 to waive the submission of
monthly returns, if the disbursing officers agree to furnish a simple certificate in Form No. 23 to the ITO every month, and also to furnish
in Form No. 21, details of employees leaving service to the ITO, immediately after their cessation of employment.
2.9 Furnishing of annual return - The submission of an annual return is, however, mandatory under section 206 of the Act. This return must
be prepared in Form No. 24, and must be delivered to the ITO on or before April 30 every year. The return should contain the following
essential details :
· The name and address of every person who has received any income chargeable under the head 'Salaries'.
· The amount of income so received by each such person and the date on which it became due or was paid.
· The amount deducted as tax at source from each such person.
Under rule 35(4), details of all employees whose income under the head 'Salaries' is more than the non-taxable minimum less Rs. 600 (i.e.,
Rs. 17,400) must be furnished in this return.
2.10 Employer has no discretion to deduct tax at lower rate or not to deduct tax - The liability to deduct tax at source is unconditionally
and absolutely fixed on the employer, and it cannot be discharged merely because, under a private arrangement, the employer has
undertaken to pay tax-free salary - John Patterson & Co. (India) Ltd. v. ITO [1959] 36 ITR 449 (Cal.). Similarly, an employer cannot
withhold the deduction merely because the employee avers that the salary received by him is not chargeable to tax or is liable to tax at a
lower rate. In such cases, the employer must direct the concerned employee to obtain a certificate from the ITO under section 197(1) of the
Act so that either no tax is deducted or tax is deducted at a lower rate. Such a situation may crop up when arrears of salary are paid and
relief under section 89(1) of the Act becomes admissible.
Dividends
3.1 Person responsible - Under section 194, the responsibility for deduction of tax at source on dividends is placed upon the principal
officer of an Indian company or a company which has made the prescribed arrangements for declaration and payments of dividends in
India. The 'arrangements' contemplated in the second category is explained in rule 27 of the Rules. 'Dividend' for this purpose shall have
the meaning assigned to it under sub-clauses (a), (b), (c ), (d) or (e) of section 2(22), and will, thus, comprehend loans to shareholders
which are treated as deemed dividend. The deduction will have to be made at the rates contained in Part II of the Finance Act of that year,
(i) before making any payment in cash, or (ii) before issuing any cheque or warrant, or (iii) before making any distribution or payment to a
shareholder.
3.2 Two exceptions - In two situations, however, no tax need be deducted at source in terms of the provisos to section 194. These are :
(i)Where the aggregate dividend payable in a year to a resident individual shareholder by a public limited company does not exceed Rs.
1,000, and the dividend is paid by such company by an account payee cheque.
(ii)Where the ITO gives a certificate in writing in Form No. 15 in the case of any shareholder other than a company, to the effect that the
total income of the shareholder is not likely to exceed the non-taxable minimum. Under rule 29, the shareholder has to apply to the
ITO in Form No. 14/14A and the ITO can grant the certificate only if (i) the relevant shares are shares in public companies, (ii) the
shares stand in the name of the applicant and are beneficially owned by him, (iii) dividends therefrom do not attract the deeming
provisions of sections 60 to 64 of the Act, and (iv) the shares standing in the applicant's name are held by him under trust wholly for
charitable or religious purposes, and the dividends qualify for exemption under sections 11 to 13 of the Act.
3.3 Mode of payment of tax - The tax deducted at source should be deposited to Government account within seven days of deduction. Tax
deducted on payments made to companies and on payments made to non-companies must be segregated and separately remitted through
challans in quadruplicate. The bank will return two copies to the payer-company.
3.4 Furnishing certificates/statements - The principal officer should furnish a certificate of deduction of tax at source to the shareholders in
Form No. 19. In addition, he should also furnish the following statements under rule 37, to the ITO having jurisdiction to assess the
company, within fourteen days of deduction of tax :
(i) Statement of tax deduction in Form No. 26, along with one copy of the said challans.
(ii)Statement in Form No. 27, containing details of dividends paid to non-resident or not ordinarily resident, non-corporate persons and to
non-Indian resident companies which have not made the prescribed arrangements for declaration and payment of dividend in India.
3.5 Furnishing annual return - Under section 206B of the Act read with rule 37B, an annual return in Form No. 27B shall be prepared and
delivered to the ITO before April 30. This return will contain details of payments of dividends of Rs. 1,000 or less, made to resident
individual shareholders, and on which no tax was deducted at source. Rule 37B(2) stipulates that the return must be accompanied by a copy
of the statement in Form No. 14B furnished by the shareholders. This will apply only to pre-1984 cases, since according to the first proviso
to section 194, as amended by the Finance Act, 1984 with effect from June 1, 1984 such statements are no longer required to be furnished
by the shareholders, and the companies have been suo moto authorised to dispense with the deduction of tax at source.
3.6 Cases where shares are registered in the name of a bank on behalf of its constituents - Where shares are registered in the name of a
banking company on behalf of its constituents, the Board have clarified [Circular No. 3P dated May 1, 1966], that tax must be deducted at
the rates applicable to a banking company without regard to the status of the beneficial owners of the shares, and that the certificate of
deduction of tax at source should be issued only to the banking company. The banking company should thereafter issue separate sub-
divided tax deduction certificates to the respective beneficial owners, in the form annexed to the aforesaid circular. This procedure is
required to be followed even in cases where shares are registered in the names of executor or trustee-companies on behalf of their
constituents.