Salaries Charge

Section 15 — SALARIES (CHARGE)

Section 15 is the charging section for the Salaries head. It charges salary on the EARLIER of (a) due basis OR (b) receipt basis, with the arrears clause preventing double-taxation. Two Explanations preserve the no-double-taxation rule for advance salary and exclude partner's remuneration (which is PGBP, not Salaries).

STATUTORY ARCHITECTURE

The 'employer-employee' nexus is the foundation. Section 15 charges salary on the EARLIER of due / receipt basis. The arrears clause ((c)) is anti-double-taxation — arrears are charged in year of receipt only if NOT earlier taxed in the year of accrual. The two Explanations cover: (1) advance-salary already taxed shall not be re-taxed when due; (2) partner's remuneration from firm is NOT salary (it is PGBP under s. 26).

JUDICIAL EVOLUTION — Master-Servant Test

The locus classicus on the employer-employee distinction is Lakshminarayan Ram Gopal & Sons Ltd. v. State of Hyderabad, (1954) 25 ITR 449 (SC) [AIR 1954 SC 364]. The Supreme Court (Mahajan, C.J., Mukherjea and Das, JJ.) laid down the master-servant test — control over the manner of work, not merely the result.

HELD: The distinction lies in this — that a master can not only order or require what is to be done but how it shall be done. A servant in this strict sense is a person whose employer has the right to control how his work shall be done. (per Lakshminarayan Ram Gopal ¶ 11).

JUDICIAL EVOLUTION — Director's Remuneration

The Supreme Court in Karam Chand Thapar & Bros. (P.) Ltd. v. CIT, (1969) 74 ITR 26 (SC), ruled that director's remuneration paid pursuant to a service contract is taxable as 'salary' if the master-servant test is satisfied; otherwise it is professional fees / business income.

HELD: Where a director functions both as a director (Board capacity) and as a managerial executive (employee capacity), the remuneration paid for the executive function is salary; the sitting fees and director-as-such fees are not. The dichotomy must be drawn by reference to the substance of the engagement. (per Karam Chand Thapar ¶ 14).

JUDICIAL EVOLUTION — Salary on 'Due' Basis

CIT v. L.W. Russel, (1964) 53 ITR 91 (SC) — employer's matching contribution to PF/superannuation becomes income only when vested rights crystallise; mere accumulation does not amount to 'due' salary.

PLANNING NOTES & LITIGATION DEFENCE

(i) For arrears of salary, claim relief u/s 157 (1961 s. 89(1)) — file Form 10E before filing return; without Form 10E, CPC denies relief. (ii) For director-employee dichotomy (especially closely-held companies), document the executive-engagement separately from board-membership — board resolution + employment letter + KRA. Cite Karam Chand Thapar. (iii) For partner's remuneration, classify as PGBP under s. 26 (Explanation 2 to s. 15 excludes from Salaries) — interest / salary / commission to partner reported in firm's return; partner's TI shows under PGBP. (iv) For advance salary received and taxed in earlier year, retain prior-year ITR + tax-paid challan to defeat any double-taxation attempt under s. 15(b).

CROSS-REFERENCES

• Section 13 — Heads of income (s. 15 implements Head A — Salaries).
• Section 16 — Income from salary (next section — computation rules).
• Section 17 — Perquisite definition.
• Section 18 — Profits in lieu of salary.
• Section 19 — Deductions from salaries.
• Section 26 — PGBP charge (partner's remuneration).
• Section 157 — Relief for arrears (1961 s. 89(1)).
• Income-tax Rules, 2026 r. 21A — manner of computing relief u/s 157.
• Form 10E — relief application.