‘SJ JOSHIHONOCL To VENKATARAMANAKASTURUSRO/OCL@IOCL 118/10/2007 02:33 PM co P RAJASEKARISRO/IOCL@IOCL, KAMESHWARA, RAO/HOMOCL@IOCL, PANKAJ K RASTOGINROMIOCL@IOCL, KAMALESH Subject Opinion on the payments made to nomineestegal heirs of deceased employees Sir, As requested, we have obtained an opinion on various payments made to nominees/legal heirs of deceased employees, which is appended below for your information and necessary action. Best regards. ‘Sunil J, Joshi Manager (F), HO We are making payments to nominees/legal heirs of deceased employees subsequent to the expiry of the eitployees The following payments are made to the nominees or legal heirs either in the same financial year of the death of the employee or in the following financial year of the deat 1. Gratuity 2. Leave encashnent for the balance leave at the credit of the employees account at the time of separation/ death 3. Sick leave (Half pay value of leave allowed as encashment on account of death) balance: lying to the tof the 2 of death. leas Raeede eck Ur Llme rupesnen serch time of death, but cannot be encashed while in service. 4. Monthly OVSS payment to nominees of deceased employee. 5. Overtime, Compensatory off encashment, Shift allowance, Tanker duty allowance, any other payments which are due to the employee for the services rendered till the date of death and paid subsequently... 6. PLI/PIS bonus paid. Arrears payment arising out of wage revision ete, The following clarification is required for the above nature of the payments to nominees/legal heirs. a Whether the payments made to the nominees are to be assessed as salary income and TDS recovery nas to be made by employer under section 1927 Wich respect to payments referred to in points no. 1 & 4 Before expressing our viens we may mention that “we understand that the OSS payment is made to an employee after reaching a prescribed age and payable monthly till the normal retixement age is reached. As per this Schone, if an employee dies after reaching the said prescribed age But before attaining the age of normal retirement, the amount bacones contractually due and payable to his/ her legal heir/ nominee. Thus, wepoderstand that both the aforesaid payments namely, gratuity, and ovss becone due tothe nominee or legal Heir (e.g. widow, childera oF gependants) upon the death of the employee and hence are assessable as arrone in the hands of the said legal heiz/ nominee. At the time of making Rayment as aforesaid, as no employer employee relationship exists berneen fhe company and nominee/ legal heirs of the deceased employee, amount paid by the company to the nominee/ legal heirs, in our view, should be taxable at the hands of the said legal heit/ nominee as income put not as "income from salaries". We draw support in this regard from the decision of the Se. L. - Thangammal vs. Third 170 (1 170 762 (Mad.)] wherein a simitar view has been taken. Section 192 of the Income-tax Act, 1961 puts an obligation upon a person who is responsible for paying any income chargeable under the head "salaries" to deduct tax fron the amount paid/ payable. Where any amount paid by a person is not chargeable under the head salary, cax is’not Fequized to be deducted at source under section 192 of the Act. In the instant case, since we have expressed’ our view that the said paynente should not be taxable under the head ‘income from salaries’ in our view, no tax should be required to be deducted at source undar section 182 st the Act therefrom. With respect to payments referred to in points no. 2 & 3 With respect to the aforesaid payments, reference is drawn to clarification given by the CBD? vide Lotter No. 35/65-r7(B) dated G3-11-1965 wherein the following has been held with respect to leave salary paid to the legal heirs of deceased~ (the leave salary paid to the legal heirs of the deceased exployee in respect of privilege leave standing to the credit of such employee at the time of his/her death is not taxable as salary. for keing taxable as salary, the payment must be due from an enployer to the assesses. I the deceased officer is regarded as the ascessee ia respect of the proposed payment, then the amount was not due to she assessee. Firstly, this is nat. a.peyment which. was-due to be paid to-him after ®. SESE Loe ul Guteieliel 1igne. Secsiely, even-beldre” his death, the payuent was not due to him unless and unti the lesve was actually taken by hin. If the legal representative of the deceased is to be taken to be the assessee, then the anount/propdsed to be paid is certainly not due to him. Than) 2, °% gratia Payment on compassionate grounds in the nature of gift. Thus, the payment is not in the nature df salary.” From the aforesaid clarification, one would note that paywent in the pacure of leave encashment paid to the legal heir of the deccased is a Payment which is not due either to the employee or his/ her legal heir and bhas is not in the nature of ‘salary' requiring deduczion of tax at source : but is in the nature of an ex gratia payment. The above Circular has been judicially noticed’ by the Hon'ble Madras Tribunal in the decision refereed above. : Baile on the issue we may refer that in Circular No, 573 dated 21-08-1990 She caot has clarified that lump sun payment nade gratuitously or by way of compensation or otherwise to the widow cr other legal heirs of af employee, who dies while still in active service, is not taxable as incone under the Act In view of above, in our view there should not be any requirement of withholding tax u/s. 192 from the subject payments. further, kindly note that in our, view the sane principle should apply in relation to payment onBesount of sick leave as the basic nature of bath the paymnets are sane, With respect to payments referred to in point no. 5 Efom the facts given to us, we understand that the aforesaid payment is Sees Ay taste the employee for services rendered by hin daring ene period upto his death. Segeion 258 0f the Act deals with taxation of incone in hands of the legal Ais Lagel aveeggoubrsection (1) thereof provides that where a percen ave fis eget representatives shall be liable to pay any sun whien Der deceased would have been Liable to pay if he had aot died in che Like THLOe nad ee nee came exEeNE as the deceased, In other words, the income which hed either accrued or arisen to the deceased on which ned hoes Tegal neiey Cepresebe. 228eesed in the hands of the deceased thvough its polar REt¥Z teprosentative. Thus, the payments of the nature aentived on Meetstbie de ee it OF the specific provision of section 139() shoud te Peprescntstine auez¥,, i, he hands of the daceased through his) hes legos sontee Chast ee raingly, the company should be Liable to deduce tee eee Act, > “heFefrom in accordance with the provisions of section 192 cf ore Act, Sais connection we may also mention that, the fion'blé Supreme Court in RrOfe (48 TR 59 (SC)] has-held that in case payment geceased as aforesaid is received by his/ nex legal gal representative in the said subsequen: year. in dther Thess, EE Liew of the said cecision rendered by the Hon'ble Apes Gone the as the incany Tesgived by the legal heirs/ representative cannes Se eemen fax choald we Of She deceased i.e. as income fron salary, in our view te ER, Mould be required to be deducted at source w/e. 192 of tha neg this scenario. points no. 6 «7 With respect to payments teferred to Serge ecto, si ungeb stud “thas aloes Layieite Way f 02 wage revisiéa or bonus enhancement for past year salar ieune being in the nature of arrear wages, retains the chaveney of SgEY 25, the same is on account Of services rendered by. the Genesee tne cle {8 Bast. As already referred in our reply to point no ss" case OE the ee gon tecount Of arrear wages is paid to the Legal regresenseciee see teaeeeoased employee in the year of his/ her death, che sone wena employer © 22 Si8zy income liable to deduction of tax at source by the employer, Eouewer, wheze the arrear wages are reveived'in the year following the Say receishe,eMPleves, for the reasons mentioned above there should’ ot be Sey requiremant for deduction of tax at source u/s, 192 of the het >. Ff the above is not to be assessed as salary income whether aappover 48 Liable to deduct tax under any other provision of treste tax Act? 2s per the Provisions of the Act, tax is required to be deducted trom any amount baig/ rgeavable, in terms of section 192 to 195 of the Act. Any fo 195 pete Payable which is nct covered within the ambit of seca, 192 Fo 295 of the act is not subjected to deduction of tax at source, Chae Portes! of provisions of section 192 to 195 of the Act, dt appears That the payments referred to in poiny no. 1 to 4 made by the companythe nominees/ legal heirs of the deceased is not covered under any of the provisions requiring deduction of tax at the tine of credit or paynent. Hence, in our view, no tax is required to be daducted while making the aforesaid payment. However, with respect to payment referred to in point no. § to 7, as the Payment represents amount due to the employee for services rendered by him prior to his death, the same, for the reasons stated above, is liable to be taxed in the hands of the legal representative of the deceased under the head salary and accordingly, ‘tax is required to be deducted by the employer u/s. 192 provided the payment is made in the year of death itself. c. Whether the above payments will be first assessed as incone of the employee and tax calculated under. section 192 and the net amount will be paid to the deceased nominees/heirs. Kindly refer reply to quezy no. (a) a. In cage the above anounts are paid subsequent to the financial year during which the employee had expired, wnat tax treatment is 20 be given? Kindly refer our reply to query no. (b). in addition to the above, please clarify whether the balance sick leave standing to the credit of the employee at the time of retirement can be considered for tax exemption of 300 days. In our opinion the Act does not contain any condition for not taking into account the days of sick leave for this purpose.