Section 15 — Salaries Chargeable to Tax

STATUTORY ARCHITECTURE — 18-ROW MAP

HISTORICAL CONTEXT — SALARY CHARGE

Section 15 is the operative charging provision for the Salaries head. Its three limbs — (a) due, (b) paid, (c) arrears — together capture the universe of employer-employee compensation timing. The 'due-ness OR receipt — whichever earlier' principle is well-established: if salary becomes due during the PY but is not yet paid, it is charged in that PY; if it is paid in advance before becoming due, it is charged in the PY of payment; arrears paid in a later PY are charged in that later PY (subject to section 89 spread-back relief).

Explanation 1 prevents double counting — where salary is paid in advance and included in one PY, it is not included again in the PY of due-ness. Explanation 2 carves out partner remuneration from the Salaries head — partner remuneration is taxed under section 28(v) as PGBP (in the partner's hands) with section 40(b) firm-level deduction limits. This is a critical structural distinction: a partnership firm pays partner remuneration as PGBP-deductible amounts subject to s. 40(b) limits; the partner offers the same as PGBP income (not Salary). The employer-employee relationship is the gateway to the Salaries head.

The master-servant test for the employer-employee relationship is foundational. Indicators include: (i) right of supervision and control over the manner of work; (ii) employer's right to dismiss; (iii) provision of tools / workplace; (iv) regular remuneration; (v) hours of work. By contrast, an independent contractor relationship (consulting / freelancing) is PGBP head. Section 194-J / 194-C TDS applies to contractor / professional fees; section 192 applies to salary.

Section 89 spread-back relief is operationally significant for arrears. Where arrears of salary are received in a PY that pushes the employee into higher slabs (causing distortion), section 89 read with Rule 21A allows spread-back over the years to which the arrears relate — Form 10E filing required. This prevents bracket-creep injustice. FA 2023 / 2024 — Form 10E filing process electronicised.

The transition to the Income-tax Act, 2025 preserves section 15 architecture. The new-regime default under section 115BAC alters available deductions but does not change s. 15's basic charge mechanism. Section 536 saving for pending arrear / advance reconciliations.

FINANCE ACT AMENDMENT TIMELINE

■ FA 1962 — Section 15 came into force; basic salary charge.

■ FA 1989 — Explanation 1 (no double counting) clarified.

■ FA 1992 — Partner remuneration treatment under Expl 2 finalised.

■ FA 2002 — Section 192 TDS framework refined.

■ FA 2018 — Standard deduction reintroduced under s. 16 (replacing transport / medical allowances).

■ FA 2020 — New regime under s. 115BAC; affects available deductions for salaried.

■ FA 2022 — ESOP perquisite TDS deferral for eligible startups (s. 191(b) / 192).

■ FA 2023 — New regime made default (s. 115BAC); standard deduction Rs 50,000 → Rs 50,000 (both regimes); rebate threshold revised.

■ FA 2024 — New regime slabs rationalised; standard deduction raised to Rs 75,000 in new regime.

■ FA 2025 — Minor calibrations.

■ Income-tax Act, 2025 — Section 15 successor, operative 1-4-2026.

JUDICIAL EVOLUTION — VERIFIED LANDMARK AUTHORITIES

▸ E.D. Sassoon & Co. Ltd. v. Commissioner of Income-tax (1954) 26 ITR 27 ; AIR 1954 SC 470 (Supreme Court — Constitution Bench)

Facts. The assessee, a managing-agent firm, transferred its managing-agency rights to a successor mid-year. The Department sought to tax the entire year's managing-agency commission in the hands of the assessee, on the ground that the right accrued only on the completion of the year. The assessee contended that the commission for the part of the year actually served had accrued month-by-month.

Issue. When does income accrue under the mercantile system — at the point of rendering service, or only on completion of the contractual cycle that fixes the quantum?

HELD. Income accrues only when there is a vested right to receive it, however remote the future date of receipt. Mere expectation, however confident, is not accrual. For income to accrue, the right must be vested — not contingent on future performance, and not subject to defeasance.

“It is clear, therefore, that income may accrue to an assessee without the actual receipt of the same. If the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later on… But unless and until there is created in favour of the assessee a debt due by somebody, it cannot be said that he has acquired a right to receive the income.”

Relevance. Foundational on the meaning of 'accrual' under section 5 (and section 4 charge timing) — anchors arguments around mid-year contracts, milestone-based engagements, contingent rights, and retention monies.

▸ Commissioner of Income-tax v. Excel Industries Ltd. (2013) 358 ITR 295 ; (2014) 2 SCC 1 (Supreme Court)

Facts. The assessee, an export-oriented unit, received DEPB licences and Advance Licences. The Department sought to tax the value of these incentives on accrual at the time of issue; the assessee contended that no income accrued until the licence was actually used or sold.

Issue. When does income accrue under the mercantile system — at the moment a right is created, or at the moment the right becomes enforceable as a debt?

HELD. Income accrues only when there is a corresponding liability of the other party. Mere creation of a contingent or unmatured right does not amount to accrual; the right must crystallise into a debt before tax incidence.

“Income accrues when there arises in favour of the assessee a debt — when there is a corresponding liability of the other party to pay the amount. It is not enough that the right has come into being; the right must ripen into a debt.”

Relevance. Anchor for accrual-vs-receipt timing disputes under section 5 / section 145 — relevant for retention monies, export incentives, contingent claim settlements, milestone-based contracts.

▸ L.W. Russel v. Commissioner of Income-tax, Kerala (1964) 53 ITR 91 ; AIR 1964 SC 1320 (Supreme Court — Constitution Bench)

Facts. The assessee, an employee, was a member of a superannuation scheme funded by employer contributions. The Department sought to bring the annual employer contribution into the employee's taxable salary as a perquisite under section 7 / section 17(2). The assessee contended that the contribution was a contingent right, not a present taxable receipt, since the employee's entitlement vested only on retirement / resignation in good standing.

Issue. Whether annual employer contributions to a superannuation scheme — where the employee's entitlement is contingent on future events — constitute a present taxable perquisite under the 'income deemed to be received' framework of section 7 read with section 17(2).

HELD. A perquisite that is merely contingent — where the employee has no present vested right and the entitlement may be defeated by future events — is not taxable as a present receipt. Section 7 deeming provisions require a vested right that has crystallised in the employee's favour. Mere employer contributions to an unfunded or contingent-entitlement scheme do not trigger section 7 charge in the year of contribution.

“Unless the right of the employee is established and is more than a contingent right, the amount cannot be brought to tax as having been received by the employee… A perquisite to be taxable must constitute a present benefit, not a mere prospect of a future benefit.”

Relevance. Anchor on section 7 'deemed received' construction — relevant for ESOPs / RSUs / superannuation contributions / phantom stock / deferred compensation design. Section 17(2)(vi) (taxing ESOP perquisites at exercise) was specifically introduced to address L.W. Russel-style contingent-receipt arguments. Still operative for genuinely contingent / forfeitable entitlements.

▸ Commissioner of Income-tax v. Vatika Township Pvt. Ltd. (2014) 367 ITR 466 ; (2015) 1 SCC 1 (Supreme Court — 5-Judge Constitution Bench)

Facts. The Department sought to apply a surcharge provision retrospectively to block-period assessments. The assessee contended that the amendment was substantive and could not have retrospective operation absent express legislative direction.

Issue. Whether amendments to taxing statutes operate prospectively unless the legislature has expressly or by necessary implication conferred retrospective effect.

HELD. The Constitution Bench reaffirmed the general rule against retrospectivity of taxing statutes. A taxing provision must be construed prospectively unless the language compels otherwise; mere insertion or substitution by amendment is not sufficient to deny vested rights.

“Of the various rules guiding how a legislation has to be interpreted, one established rule is that unless a contrary intention appears, a legislation is presumed not to be intended to have a retrospective operation.”

Relevance. Anchor authority for any argument that an amendment to a charging or computational provision must apply only from the AY notified — useful in transitional disputes around FA 2025 and the 1961 → 2025 changeover.

▸ K.P. Varghese v. Income-tax Officer, Ernakulam (1981) 131 ITR 597 ; (1981) 4 SCC 173 (Supreme Court — 3-Judge Bench)

Facts. Section 52(2) (since deleted) deemed sale consideration to be FMV where FMV exceeded the declared consideration by 15%. The Department applied it on a literal reading even when the assessee had not in fact received more than the declared price.

Issue. Whether a deeming provision in a charging schema can be construed literally where its plain reading produces a result manifestly contrary to legislative object.

HELD. The Court read down section 52(2) to apply only where the assessee had actually received consideration in excess of the declared sum. A literal construction yielding absurd or unjust results must yield to an object-based interpretation; the CBDT's contemporaneous Circular No. 96 was held binding on the Revenue.

“It is well settled that a literal construction of a statutory provision ought not to be adopted if it produces a manifestly unjust result… Where a literal construction creates an anomaly, the courts will adopt that construction which avoids the anomaly.”

Relevance. Anchor authority for purposive construction of deeming fictions across the 1961 Act — applies wherever a deeming clause (e.g., s. 50C, s. 56(2)(x), s. 2(22)(e)) yields a result contrary to legislative purpose.

CBDT CIRCULARS — SECTION 15 ECOSYSTEM

▸ CBDT Circular No. 14(XL-35) of 1955 dated 11 April 1955

Subject. Duty of officers to assist assessees in claiming and securing relief

Substance. Foundational circular directing that the AO should not exploit assessee ignorance to deny legitimate reliefs; officer is required to draw attention to refunds or reliefs to which the assessee is entitled. The circular has been judicially noted in several appellate decisions and remains operative for first-appellate practice.

▸ CBDT Circular No. 549 dated 31 October 1989

Subject. Explanatory notes — Finance Act 1989 amendments (incl. PY unification)

Substance. Explained the FA 1987 / FA 1989 amendments unifying the previous year with the financial year preceding the AY, including transitional provisions for assessees with different accounting years. Useful in any controversy on the timing of accrual / chargeability for early post-1989 AYs.

▸ CBDT Circular No. 5 of 2014 dated 11 February 2014

Subject. Section 14A — dis-allowance even where no exempt income earned (since modulated)

Substance. Initially directed AOs to apply Rule 8D disallowance under section 14A even where no exempt income was earned in the year; subsequently modulated by Cheminvest (Del HC) and Maxopp (SC). FA 2022 amendment to section 14A re-asserted the position but remains under litigation.

▸ CBDT Circular No. 6 of 2019 dated 20 March 2019

Subject. Withdrawal of low-tax-effect appeals — monetary thresholds

Substance. Revised monetary thresholds for departmental appeals — ITAT (Rs 50L), HC (Rs 1 Cr), SC (Rs 2 Cr); subsequently further revised. Operates as a non-statutory limitation on the Revenue's appellate engagement, binding under section 119.

WORKED EXAMPLES — APPLICATION OF SECTION 15

PRACTITIONER PLANNING NOTES — SECTION 15

■ Earlier of due / receipt rule — verify timing of charge under s. 15(a) vs. (b).

■ Advance salary — Expl 1 prevents double charge; document advance payments.

■ Arrears — Section 89 spread-back via Form 10E; significant relief; mandatory filing.

■ Partner remuneration — NOT salary; PGBP head (s. 28(v)) + s. 40(b) firm-level limits.

■ Master-servant test — distinguish employee from independent contractor; documentation discipline.

■ ROR foreign salary — full inclusion; FTC via Form 67.

■ RNOR foreign-source salary — excluded if services rendered outside India (subject to s. 5(1) proviso).

■ NR salary — only services rendered in India (s. 9(1)(ii)).

■ New regime under s. 115BAC — default; HRA / LTC / s. 10(14) allowances unavailable in new regime.

■ Section 89 Form 10E — mandatory; file before s. 139 due date.

■ Section 192 employer TDS — comprehensive; Form 16 + Form 12BA + Form 24Q reconciliation.

■ Section 192A — TDS on premature PF withdrawal (5%-10% based on PAN availability).

■ ESOP TDS deferral — s. 191(b) for eligible startup employees (FA 2020).

■ Pension income — within Salaries head (s. 17(2) extended); commuted pension exemption under s. 10(10A).

■ Documentation discipline — Form 16 / 12BA / 26AS / AIS — preserved 7 years; for foreign assets 17 years.

LITIGATION DEFENCE — SECTION 15 ARGUMENTS

■ ED Sassoon anchor — vested-right test; salary not yet vested is not income.

■ Excel Industries anchor — accrual presupposes debt; contingent rights not income.

■ LW Russel anchor — contingent perquisites / unfunded benefits not within s. 15 timing.

■ Strict construction — Mathuram Agrawal anchor.

■ Object-based interpretation — K.P. Varghese anchor; argue against absurd results.

■ Vatika Township anchor — amendments operate prospectively.

■ Master-servant defence — produce employment contract / control evidence; rebut AO's reclassification of contractor income as salary.

■ Partner remuneration defence — Expl 2 clear; reject AO's salary recharacterisation.

■ Section 89 spread-back defence — produce Form 10E + Rule 21A working; preserve relief.

■ Advance salary defence — Expl 1 prevents double charge; reject AO's reinclusion.

■ Arrears characterisation — argue accurate year-of-relation; spread-back maximises relief.

■ ROR / RNOR / NR classification defence — preserve correct scope filter.

■ FTC defence — Form 67 filing within s. 139(1) due date; produce treaty article + foreign tax receipt.

■ Hindustan Coca-Cola anchor — TDS double-recovery defence; if employer paid TDS, no demand against employee.

■ Engineering Analysis anchor — cross-border salary classification under treaty.

■ Calcutta Discount anchor — Article 226 jurisdiction against jurisdictional errors in s. 15 application.

PROCEDURE — APPLYING SECTION 15

Step 1. Confirm employer-employee relationship

Master-servant test; documentation of employment contract.

Step 2. Identify salary streams

Basic / DA / HRA / LTC / allowances / bonus / commission / commutation / leave salary / arrears.

Step 3. Apply s. 15(a) — salary due

Whether paid or not; due-date governs.

Step 4. Apply s. 15(b) — salary paid

Even if not yet due; advance-payment captured.

Step 5. Apply s. 15(c) — arrears

Paid in current PY relating to earlier PYs.

Step 6. Apply Expl 1 — no double counting

Advance once, due once — not both.

Step 7. Apply Expl 2 — partner remuneration carve-out

Partner remuneration → PGBP, not Salaries.

Step 8. Apply s. 10 pre-charge exemptions

HRA / LTC / gratuity / commuted pension / leave salary — within applicable limits.

Step 9. Apply s. 16 head-specific deductions

Standard deduction + entertainment (govt) + professional tax.

Step 10. Apply scope filter under s. 5

ROR — worldwide; RNOR — Indian-source + foreign-business-controlled; NR — services in India.

Step 11. Apply DTAA Article 14/15

For cross-border salary — treaty exemption / credit.

Step 12. File Form 10E for arrears (s. 89)

Before s. 139(1) due date; preserve spread-back relief.

Step 13. Reconcile with Form 16 / 12BA / 26AS

Cross-tally employer TDS records.

Step 14. ITR Schedule S

Salary head computation + standard deduction + 89 relief.

Step 15. Documentation

Form 16 / 12BA / 10E / employment contract — retained 7 years.

CROSS-REFERENCES

▸ Section 2(31) — Person.

▸ Section 4 — Charge.

▸ Section 5 — Scope.

▸ Section 9(1)(ii) — Salary deemed to accrue / arise in India.

▸ Section 10 — Pre-charge exemptions (HRA / LTC / gratuity / etc.).

▸ Section 10(13A) — HRA.

▸ Section 10(14) — Special allowances.

▸ Section 10(10) — Gratuity.

▸ Section 10(10A) — Commuted pension.

▸ Section 10(10AA) — Leave salary.

▸ Section 14 — Heads of income (Salaries).

▸ Section 14A — Disallowance for exempt income.

▸ Section 16 — Deductions from salaries.

▸ Section 17 — Salary / perquisite / profits in lieu.

▸ Section 28(v) — Partner remuneration as PGBP.

▸ Section 40(b) — Firm-level limits on partner remuneration.

▸ Section 80 series — Chapter VI-A deductions.

▸ Section 89 — Spread-back relief.

▸ Section 90 / 90A / 91 — DTAA / FTC.

▸ Section 115BAC — New regime.

▸ Section 139 — Return of income.

▸ Section 192 — TDS on salary.

▸ Section 192A — TDS on premature PF withdrawal.

▸ Section 194T — TDS on partner remuneration (FA 2024).

▸ Section 197 — Lower / nil deduction certificate.

▸ Section 201 — TDS default.

▸ Section 270A — Penalty under-reporting.

▸ Section 271C — Penalty on TDS default.

▸ Section 276B — Failure to pay TDS.

▸ Income-tax Rules — Rule 2A / 2B / 2BA / 2BB / 3 / 6 / 21A.

▸ Form 12BA / 12BB / 16 / 16A / 10E / 24Q.

▸ ITR-1 / ITR-2 — Schedule S.

▸ EPF & Miscellaneous Provisions Act, 1952.

▸ DTAA — Article 14 (Independent personal services), Article 15 (Dependent personal services).

▸ Income-tax Act, 2025 — Section 15 (successor), operative 1-4-2026.

▸ Income-tax Act, 2025 — Section 536 (saving).