Section 15 and Section 192 (TDS on Salary)--At Odds?

Hi Ajay, Ramji and Mahendraji,

On a cursory glance at Section 192, it does seem that TDS on gratuity that became due on 31st March 2008 and was credited to the employee on that day, would become liable to be deducted only when the gratuity cheque is written out to the employee. This is because unlike all other sections requiring deduction of tax at source, Section 192 doesn't talk about liability for making TDS at the time of credit or payment whichever is earlier. A reason why Section 192 is worded this way could be because of payments like Commission to Directors. The companies' accounts are prepared as late as September; and the commission, which is calculated as a percentage of the profits of the company, can be known only after profits have been determined. The companies calculate the commission and provide for it on 31st March. Now TDS return in respect of salaries and the due date of deposit of TDS have already gone past long before the Balance Sheet of the company is finalized. So there is no way the company can be made liable to make TDS on Director's commission just because it makes the entry on 31st March. The company deducts TDS in the current year at the time of making the payment. The company is supposed to provide for the commission on 31st March itself, although it becomes "due" in the employee's hands only in the current year. Section 15 says that salary becomes taxable in the employee's hands the moment it falls due, no matter which year has it been received in. So when the employee gets the right to receive gratuity vested in him on 31st March 2008, it is beyond any doubt that that gratuity is taxable in his hands in A Y 2008-09. Section 192 calls for tax deduction at the time of payment, it also speaks of the "RATES IN FORCE FOR THE FINANCIAL YEAR IN WHICH THE PAYMENT IS MADE, ON THE ESTIMATED INCOME OF THE ASSESSEE UNDER THIS HEAD FOR THAT FINANCIAL YEAR."There does appear to be a contradiction between Section 15 and Section 192. I do wish that Section 192 could have been more unambiguously worded. The estimated income obviously means the income for the financial year in which the employee rendered services. But the section says TDS is to be made by using the rates in force for the financial year in which the payment is made. When the gratuity is taxable in the employee's hands in A Y 2008-09, how can the employer apply the rates in force for A Y 2009-10 upon releasing the gratuity in April 2008? The rates in force mentioned in Section 192 cannot be interpreted any other than those on which the employee is assessable u/s 15. And in respect of gratuity becoming due on 31st March 2008, the rates will be those of the A Y 2008-09. I think we need not treat gratuity any different from the salary paid ordinarily from month to month. To me it seems TDS need be deducted only on the occasion of actual payment of gratuity and not 31st March. This is despite the fact that gratuity in the case at hand is quite unlike the director's Commission—-gratuity liability did get crystallized on 31st March itself unlike the commission liability. But then routine monthly salary got crystallized on 31st March too; but we don't say TDS on that should've been deducted on 31st March itself. This viewpoint is also supported by at least one case law.In the case of Y S C Babu Vs Chairman & MD, Syndicate Bank [2002] 120 TAXMAN 88 (AP) it was held that "sub-Chapter (B) of Chapter XVII contains provisions of sections 192 to 206B of the Act dealing with deduction of tax at source in different situations contemplated thereunder. What is deductible at source is only the tax at the rate applicable on the amount, which is actually fallen due and is paid. Only in a case where a salary accrued to an employee and THE SAME IS PAID, the employer can deduct tax at source under section 192 AND NOT OTHERWISE. In other words, accrual as well as payment of salary should co-exist in order to attract the provisions of section 192."We also need to delink the taxability of salary in the employee's hands from the employer's liability to make TDS on it. Under Section 15, any item of salary will become taxable as soon as it becomes due. But this state of affairs can not be extended to Section 192—the legislature has used the words `at the time of payment" in that section willfully and not loosely. And the liability for TDS on salary cannot on a mere credit entry in the books. There has to be a payment. So I think TDS on gratuity booked on 31st March 2008 but paid in April 2008 will be made only in April. Thanks,CA Sanjeev Bedi --- In

ICAI_CIRC_MEERUT_ CA@yahoogroups. com, MAHENDRA PRAJAPATI wrote:>> Dear Ajay Rajput,> > I admit that I have missed the word in Bold and you are absolutely correct.But I have one thought i.e. what salary chapter says. Salary will be taxable on due or receipt basis whichever is earlier. And the moment on which it becomes taxable tax has to be deducted on it.Here employer has to deduct tax. I am not at all saying that you are wrong. Refering to Section 192, you are right. But don't you think that this is contracdictory.> > As during the year 2007-08, something becomes taxable on due basis & tax will be deducted on it.> So I request you to pls.give your opinion as to my thought.> > I will wait for reply.> > Thanks,> > Mahendra> > > ajay rajput wrote:> > Dear Mahendra Ji,> > Please go through with Section 192 its is being reproduced hereunder for your ready reference...> > Salary.> 192. (1) Any person responsible for paying any income chargeable under the head “Salaries” shall, at the time of payment, deduct income-tax on the amount payable at the average rate of income-tax computed on the basis of the rates in force for the financial year in which the payment is made, on the estimated income of the assessee under this head for that financial year.> > > I think you have missed the words in bold..> > > With Regards > > CA AJAY RAJPUT > New Delhi