From Employment to Ownership: A Doctrinal Analysis of Salary and House Property Taxation under the Income Tax Act, 1961
Introduction
The scheme of income taxation in India is built upon a carefully structured statutory framework under the Income Tax Act, 1961. While Section 4 of the Act imposes the charge of income tax, the true scope and mechanics of taxation emerge only when read in conjunction with Section 2(24), which defines income, Section 5, which determines the scope of total income, and the classification of income under distinct heads prescribed in Section 14. Among these heads, “Income from Salary” and “Income from House Property” represent two foundational pillars of the Indian income tax system.
The taxation of salary is rooted in the existence of an employer–employee relationship and is governed by principles of accrual and receipt. In contrast, taxation of house property is premised upon ownership and is computed based on “annual value,” which may even be notional in character. This doctrinal contrast between employment-based income and ownership-based income reflects the compartmentalized and systematic design of the Act.
This article undertakes a comprehensive legal and practical examination of the concept of income and the taxation of salary and house property, supported by statutory provisions and judicial interpretations.
The Concept of Income under the Act
Section 2(24) of the Income Tax Act, 1961 defines “income” in an inclusive manner. The legislative intent behind such drafting is to ensure elasticity and prevent tax avoidance through restrictive interpretation. The provision includes profits and gains, dividends, voluntary contributions, perquisites, capital gains, and winnings from lotteries, among other receipts. The inclusive character makes it clear that income is not confined to traditional notions of periodical monetary returns but extends to statutory inclusions that reflect economic benefit.
Judicial exposition has significantly shaped the contours of this concept. In CIT v. Shaw Wallace & Co., the Privy Council described income as a periodical monetary return “coming in” with some regularity from definite sources. Although this classical description emphasized periodicity, modern taxation jurisprudence recognizes that even one-time receipts may constitute income if the statute so provides.
The Supreme Court in Emil Webber v. CIT clarified that any benefit received in cash or kind arising from business or professional activity may fall within the ambit of income if it is covered by statutory inclusion. Simultaneously, courts have evolved the doctrine of “real income,” ensuring that taxation is levied on genuine accruals rather than hypothetical or illusory gains. This principle safeguards fairness in taxation and aligns statutory provisions with economic reality.
Scope of Total Income and Incidence of Tax
The scope of taxation is determined by Section 5, which links taxability to residential status. A resident is taxable on income received in India, income accrued or arising in India, and income accrued or arising outside India, thereby covering global income. A non-resident, on the other hand, is taxed only on income received in India or income accruing or deemed to accrue in India.
In CIT v. Keshav Mills Ltd., the Supreme Court emphasized that income is taxable at the point of first receipt and that subsequent remittance does not amount to fresh receipt. This principle reinforces the territorial nexus underlying Indian taxation and prevents double taxation of the same receipt.
Thus, Sections 4 and 5 operate harmoniously—one creating the charge and the other defining its reach.
Income from Salary: Employment as the Basis of Taxation
Income under the head “Salary” is governed by Sections 15 to 17 of the Act. The foundational requirement for taxation under this head is the existence of an employer–employee relationship. Without such a relationship, remuneration cannot be taxed as salary and may instead fall under “Profits and Gains of Business or Profession.”
Section 15 provides that salary is taxable when it becomes due or when it is received, whichever is earlier. This accrual-based system ensures that tax liability cannot be deferred merely by postponing actual payment. The emphasis on accrual reflects the principle that income is taxable when a right to receive it crystallizes.
The Supreme Court in CIT v. L.W. Russel reiterated that the employer–employee relationship is essential for taxation under this head. The nature of the relationship, rather than the nomenclature of payment, determines taxability.
Section 17(1) adopts a broad definition of salary, encompassing wages, annuity, pension, gratuity, fees, commission, advance salary, and leave encashment. This comprehensive approach ensures that diverse forms of employment remuneration are brought within the tax net.
Perquisites and Profits in Lieu of Salary
A distinctive feature of salary taxation is the inclusion of perquisites under Section 17(2). Perquisites represent benefits provided by the employer in addition to monetary salary. These may include rent-free accommodation, concessional loans, motor car facilities, and employer contributions exceeding prescribed limits.
In Union of India v. M.N. Nadkarni, the Supreme Court held that perquisites are taxable if they confer a real and measurable monetary benefit upon the employee. The valuation of such benefits is governed by the Income Tax Rules, ensuring objectivity and uniformity.
Section 17(3) further includes profits in lieu of salary, such as compensation received upon termination of employment. These provisions prevent the structuring of employment benefits in a manner that circumvents taxation.
Deductions under Section 16 are limited and specifically enumerated, reflecting the legislative intent to maintain simplicity in computation under this head.
Income from House Property: Ownership and Notional Taxation
Unlike salary, which arises from personal service, income from house property is based upon ownership. Section 22 provides that the annual value of property consisting of any building or land appurtenant thereto, of which the assessee is the owner, shall be chargeable to tax under this head, provided it is not used for own business or profession.
In East India Housing & Land Development Trust Ltd. v. CIT, the Supreme Court held that rental income derived from ownership of property is taxable under this head even if letting is part of business activity. The classification depends upon the inherent nature of income.
Section 23 prescribes the method for determining annual value. It may be based on expected rent, actual rent, or municipal valuation, and in certain cases, self-occupied property may have nil annual value. The concept of notional taxation demonstrates that house property income is not always dependent on actual receipt.
Section 24 provides statutory deductions, including a standard deduction of 30 percent of net annual value and deduction for interest on borrowed capital. This simplified deduction mechanism avoids disputes over actual expenditure.
The Supreme Court in CIT v. Podar Cement Pvt. Ltd. adopted a pragmatic interpretation of ownership, holding that a person entitled to receive income in his own right may be treated as owner even without formal registered title.
Doctrinal Distinction: Employment versus Ownership
The contrast between salary and house property taxation reflects the structural logic of the Act. Salary taxation is service-oriented and grounded in contractual employment relationships. House property taxation, by contrast, is asset-oriented and grounded in ownership.
While salary is taxed upon accrual or receipt, house property may be taxed on notional annual value. The method of computation, allowable deductions, and underlying principles differ significantly, demonstrating the compartmentalized approach of the Act.
This doctrinal distinction ensures that income is taxed according to its true character and economic source.
Conclusion
The Income Tax Act, 1961 establishes a coherent and systematic framework for taxation by defining income expansively, determining its territorial scope, and classifying it under distinct heads. The heads “Salary” and “Income from House Property” exemplify two fundamental bases of taxation—employment and ownership.
Judicial interpretation has played a crucial role in clarifying ambiguities and aligning taxation with economic substance. From accrual principles in salary taxation to notional annual value in house property, the Act balances statutory precision with practical considerations.
In an era characterized by remote employment arrangements and expanding real estate investments, understanding these doctrinal foundations remains indispensable for taxpayers, practitioners, and students of law alike. The journey from employment to ownership is not merely economic—it is deeply embedded in the structure of India’s income tax jurisprudence.
References
Statutes
Income Tax Act, 1961 – Sections 2(24), 4, 5, 15–17, 22–24
Income Tax Rules, 1962
Case Laws
CIT v. Shaw Wallace & Co.
Emil Webber v. CIT
CIT v. Keshav Mills Ltd.
CIT v. L.W. Russel
Union of India v. M.N. Nadkarni
East India Housing & Land Development Trust Ltd. v. CIT
CIT v. Podar Cement Pvt. Ltd.
Books
Kanga, Palkhivala & Vyas – The Law and Practice of Income Tax
Ahuja & Ahuja – Systematic Approach to Income Tax
Dr. Vinod K. Singhania – Students’ Guide to Income Tax
Online Sources
Income Tax Department – https://www.incometax.gov.in
CBDT Circulars and Notifications
Author Bio
