Circular No. 278-Income Tax dated 26-8-1980

FINANCIAL YEAR 1980-81

 Instructions for deduction of tax at source from salary during financial year 1980-81 at the rates specified in Part III of First Schedule to Finance (No. 2) Act, 1980

1. I am directed to invite a reference to this Ministry’s Circu­lar No. 266 [F. No. 275/12/80-IT(B)], dated 24-4-1980, wherein it was intimated that the deduction of  income-tax at the same rates as were applicable during the financial year 1979-80 may continue to be made during the financial year 1980-81 from the payments of income chrgeable under the head “Salaries” under section 192.

2. In the Finance (No. 2) Act, 1980, some modifications in the exemption limit, etc., have been made. An extract of Sub-Paragraph I of Paragraph A of Part III of the First Schedule to the Finance (No. 2) Act, 1980 is given in Annex I.

3. The subsance of the main provisions in the law so far as they relate to income chargeable under the head “Salaries”, on which tax is to be deducted at source during the financial year 1980-81, is given hereunder :

(1) No tax will be deductible at source in any case unless the estimated salary income for the financial year exceeds Rs. 12,000. Where such income exceeds Rs. 12,000 by a small margin, the person will be entitled to marginal relief as provided in the said Sub-Paragraph I of Paragraph A. A few typical examples of calculations are given in Annex II. (Example II illustrates the calculation of the marginal relief.)

(2) The value of perquisites by way of free or concessional resi­dential accommodation, or motor cars provided by employers to their employees shall be determined under rule 3 of the Income-tax Rules. Furhter, the value of other benefits or amenities provided free of cost or at concessional rates to the employees like supply of gas, electric energy, water for household consumption, educational facilities, etc., should also be taken into account for the purpose of computing the estimated salary income of the employees during the current financial year. [Example III in Annex II illustrates computation of some such perquisites].

(3) The amount repaid to an employee from the Additional Dearness Allowance Deposit Account under the provisions of the Additional Emoluments (Compulsory Deposit) Act, 1974 shall be liable to be included in his total income of the previous year in which it is repaid as already explained in this Ministry’s Circular No. 182 [F. No. 275/12/75-ITJ], dated 28-10-1975. The amount repaid will include an element of interest also. While the repayment of the principal sum will be regarded as salary paid during the relevant financial year and assessed to tax, accordingly, the interest element will qualify for deduction in accordance with section 80L of the Act.

(4) The amount of deposit made by a taxpayer under the Compulsory Deposit Scheme (Income-tax Payers) Act, 1974 is not allowable as deduction in computing his taxable income. Accordingly, such deposit has to be ignored for the purpose of determining the amount of income-tax deductible at source.

(5) Under section 16, the taxable salary is to be computed after providing a standard deduction. The standard deduction is to be allowed of an amount equal to 20 per cent of the salary up to Rs. 10,000 and 10 per cent of the salary in excess thereof, subject to a maximum of Rs. 3,500. For this purpose, the term “salary” will include fees, commission, perquisites or profits in lieu of or in addition to salary but will not include any payments received by the employees which are specifically exempt from tax under clauses (10),(10A), (10B), (11), (12) and (13A) of section 10. Thus house rent allowance to the extent exempt under section 10(13A) will not be taken into account for the purpose of comput­ing the amount of the standard deduction. It is to be noted that the standard deduction on the above basis is to be allowed irre­spective of whether any expenditure incidental to employment is actually incurred by the employee or not. This deduction will be available also to persons drawing pension during the curren t finan­cial year at the same rates and subject to the same ceiling as the employees in actual service. Further, the standard deduction will be limited to Rs. 1,000 only in cases (a) where the employee is in receipt of a conveyance allowance at any time during the financial year, or (b ) where he is provided with any motor car, motor cycle, scooter or other moped by his employer (for use otherwise than wholly and exclusively in the performance of his duties), or where he is allowed the use of any one or more  motor cars (otherwise than wholly and exclusively in the performance of his duties) out of a pool of motor cars owned or hired by the employer at any time during the financial year. In this connec­tion it may be noted that the use of motor car by the employee for the purposes of going from his residence to the place where the duties of his employment are to be performed, or from such place back to his residence will not be regarded as use of the motor car in the performance of his duties.

(6)(a) under section 80C, while computing the taxable income the disbursing officers should allow for the current financial year i.e., 1980-81, a deduction of the whole of the first Rs. 5,000, 50 per cent of the next Rs. 5,000, and 40 per cent of the balance of the qualifying amount of payments towards life insurance premia, contributions to provident fund [including contribution to Public Provident Fund constituted under the Public Provident Fund Act, 1968], contributions for participation in the Unit-linked Insur­ance Plan, 1971, made under section 19(1)(cc) of the Unit Trust of India Act, 1963 and deposits in a 10-year account or 15-year account under the Post Office Savings Bank (Cumulative Time Deposits) Rules, 1959. The qualifying amount of payments of all  these items will be limited to 30 per cent of the estimated “salary” [after allowance of standard deduction referred to in item (5) above], or Rs. 30,000 whichever is less.

(b) In respect of contributions to “recognised provident funds” there is another monetary ceiling limit laid down in clause (d) of sub-section (2) of section 80C, in that the employ­er’s own contribution to his individual account in that fund will not exceed one-fifth of his salary during the financial year or Rs. 10,000, whichever is less. “Salary” for this purpose would include dearness allowance, if the terms of employment so pro­vide, but will exclude all other allowances or perquisites. The expression “recognised provident fund” has been defined in sec­tion 2(38), to mean a provident fund which has been and continues to be recognised by the Commissioner in accordance with the rules contained in Part A of the Fourth Schedule and includes a provi­dent fund established under a scheme framed under the Employees’ Provident Funds Act, 1952.

The additional monetary ceiling of one-fifth of salary or Rs. 10,000, whichever  is less, will not be applicable to the contri­butions to the provident funds referred to in sub-clauses (iii) and (iv) of clause ( a) of sub-section (2) of section 80C. Such provident funds are :

(i)   Government provident fund and railway provident fund;

(ii)   provident funds established by such local authorities and institutions as are mentioned in the Schedule to the Provi­dent Funds Act, 1925 and those notified by the Government from time to time under section 8(3) of that Act; and

(iii)   any provident fund set up by the Central Govern­ment and notified by it in the Official Gazette—Public Provident Funds set up under the Public Provident Fund Act, 1968 is an example of such a fund.

(7) Section 80FF has been omitted vide section 14 of the Finance (No.2) Act, 1980 as it has become redundant with the increase in the exemption limit to Rs. 12,000. No deduction is, therefore, to be given under this section.

(8) Under section 80U, in the case of every resident individual who is blind or suffers from permanent physical disability, which substantially reduces his capacity to engage in gainful employ­ment, a deduction of Rs. 15,000 from the total income is allowa­ble by the employer, vide this Ministry’s Circular No. 272, dated 27-5-1980. The Finance (No. 2) Act, 1980 has raised this limit to Rs. 10,000. Subject to fulfilment of the conditions prescribed in the above referred circular, deduction up to the increased limit of Rs. 10,000 may be allowed from salary for the purposes of deducting tax at source.

(9) Under section 10(13A), any special allowance specifically granted to an assessee by his employer to meet expenditure actu­ally incurred on payment of rent (by whichever name called) in respect of residential accommodation occupied by the assessee is exempt from income-tax to the extent (not exceeding Rs. 400 per month), as may be prescribed, having regard to the area or  place in which such accommodation is situated and other relevant considerations. Rule 2A of the Income-tax Rules prescribes the limits in re­spect of the amount which is not to be included in the total income of the assessee for the purpose of section 10(13A). It has to be noted that only the expenditure actually incurred of rent in respect of residential accommodation occupied by the assessee, subject to the limits laid down in rule 2A, qualifies for exemp­tion from income-tax. Thus, house rent allowance granted to an employee who is residing in a house/flat owned by him is not exempt from income-tax. The disbursing authorities should satisfy themselves in this regard by insisting on production of evidence of actual payment of rent before excluding the house rent allow­ance from the taxable income of the employee.

However, the Hon’ble Punjab and Haryana High Court has held in the case of CIT v. Justice S.C. Mittal [1980] 121 ITR 503/[1980] 3 Taxman 221 that even in the case of an assessee occupying his own house, the house rent allowance received from the employer is not liable to tax subject to the limitations imposed under section 10(13A) and rule 2A. That judgment had not been accepted by this Ministry and a Special Leave Petition to the Hon’ble Supreme Court has been filed. The disbursing authorities are, however, required to allow exemption in respect of house rent allowance granted to every employee assessable/assessed to income-tax under the jurisdiction of the Hon’ble Punjab and Haryana High Court, and who is residing in the house/flat owned by him subject to the limits laid down in rule 2A. The actual rent paid for the purpose of the said rule would be deemed to be the annual letting value of the house/flat for which production of evidence in the form of a document showing the annual letting value fixed by the munici­pal authority, etc., may be insisted upon before granting the exemption. In the annual salary return asterisk (*) against the name of each such employee may be given together with the follow­ing remark at the end of the return :

“*Admissible exemption of HRA allowed in view of judgment in Justice S.C. Mittal’s case.”

(10) No deduction should be made from the salary income in re­spect of any donations for charitable purpose. The tax relief on such donations, as admissible under section 80G, will have to be claimed by the taxpayer separately at the time of the finalisation of the assessment. However, in cases where contributions to the National Defence Fund, Jawaharlal Nehru Memorial Fund, the Prime Minister’s Drought Relief Fund, or the Prime Minister’s National Relief Fund are made 50 per cent of such contributions may be deducted computing the taxable income of the employee. Deduction will not be admissible where the aggregate of all contributions for the year is less than Rs. 250.

(11) Under section 80GG, an assessee is entitled to a deduction in respect of house rent paid by him for his own residence at the places specified under rule 11B of the Income-tax Rules. Such deduction is permissible subject to the following conditions :

(a)   The assessee has not been in receipt of any house rent allowance specifically granted to him which qualifies for exemp­tion under section 10(13A).

(b)   He will be entitled to a deduction in respect of house rent paid by him in excess of 10 per cent of his total income, subject to a ceiling of 15 per cent thereof, or Rs. 300 per month, whichever is less. The total income for working out these percentages will be computed before making any deduction under section 80GG.

(c)   The assessee does not own any house property himself anywhere, nor does his spouse, minor child or the HUF of which he is member, owns an house property anywhere.

(d)   The accommodation occupied by him for the purpose of his own residence is situated in any of the following places, namely, Agra, Ahmedabad, Amritsar, Banglore, Bombay, Calcutta, Cochin, Coimbatore, Delhi, Hyderabad, Indore, Jabalpur, Jaipur, Kanpur Lucknow, Madras, Madurai, Nagpur, Patna, Pune, (Poona), Sholapur, Srinagar, Surat, Trivandrum, Vadodara (Baroda) and Varanasi (Banaras).

The disbursing authorities should satisfy themselves that all the conditions mentioned above are satisfied before such deduction is allowed by them to the assessee. They should also satisfy them­selves in this regard by insisting on production of evidence of actual payment of rent.

(12) Section 10(14) provides for exemption from income-tax of any special allowance or benefit, not being in the nature of an entertainment allowance or other perquisite within the meaning of clause (2) of section 17, specially granted to the employee to meet the expenses actually incurred wholly, necessarily and exclusively in the performance of duties of an office or employ­ment of profit. In view of this provision, disbursing authorities have been authorised vide Board’s Circular No. 196 [F. No. 275/29/76-ITJ], dated 31-3-1976 not to deduct tax at source from conveyance allowance granted to an employee, to the extent it is exempt under the said section. It has been stated therein that the employee in receipt of conveyance allowance would have to furnish the necessary certificate before the disbursing authority in support of the fact that the conveyance allowance is only a reimburse­ment of expenses laid out wholly, necessarily and exclusively in the performance of duties of an office or employment of profit. The satisfaction of the disbursing authorities would still be liable for scrutiny by the Income-tax Officer during regular assessment proceedings before him. The disbursing authority is also required to endorse a certificate in terms of section 10(14 ) of the tax deduction certificate issued under section 203. In this connection, attention is invited to the Explanation to section 10(14) which clarifies that any allowance granted to the assessee to meet his personal expenses at the place where the duties of his office or employment of profit are ordinarily performed by him or at the place where he ordinarily resides, shall not be regarded for the purposes of that clause, as a special allowance granted to meet expenses wholly, necessarily and exclusively incurred in the performance of such duties. This may be kept in view while decid­ing whether any expenditure from the special allowance has been actually incurred and, if so, the extent to which it has been incurred, to meet the expenses wholly, necessarily and exclu­sively in the performance of duties of an office or employment of profit.

(13) Section 80RRA provides that where the gross total income of an individual, who is a citizen of India, includes any remunera­tion received by him in foreign currency from any employer (i.e., a foreign employer of an Indian concern) for any services ren­dered by him outside India, 50 per cent of such remuneration will be deducted in computing the taxable income. It also provides that where the assessee renders continuous service abroad for more than 36 months, the remuneration received by him for any period of serv­ice after the expiry of the said 36 months will not qualify for any deduction. In the case of employees of the Central Government or any State Government, or person who was, immediately before taking up service outside India, in the employment of the Cen­tral Government or any State Government, the deduction will be allowed, only if the service of the employee is sponsored by the Central Government. In the case of other individuals the deduc­tion will be allowed only if the individual is a “technician”. and the terms and conditions of his service outside India are approved for the purposes of the said section by the Central Government or the prescribed authority. It is pertinent to note that  the deduction is to be allowed with reference to the remuneration received by the individual in “foreign currency”. Thus, if a part of the remuneration is paid to the Indian technician, etc., in Indian currency, the amount paid in Indian currency will not be taken into account for the purposes of the deduction under section 80RRA. The expression “foreign employer” has been defined under Explanation (b) to section 80RRA to mean—

(a)   the Government of a foreign State, or

(b)   a foreign enterprise, or

(c)   any association or body established outside India.

Where the continuous service outside India exceeds 36 months, the deduction admissible under section 80RRA may be limited to a period of 36 months. In allowing the deduction, documentary evidence should be obtained on the following points :

(a)   in the case of an individual who is in the employment of the Central Government or any State Government, the fact of his having service been sponsored by the Central Government; and

(b)   in the case of any other individual being a technician, the fact of the terms and conditions of his service outside India having been approved in this behalf by the Central Government (Ministry of Finance, Department of Revenue — Foreign Tax Divi­sion, New Delhi).

(14) The total income computed in accordance with the provisions of the Act, should be rounded off to the nearest multiple of Rs. 10 by ignoring the fraction  which is less than Rs. 5 and increasing the fraction which amounts to Rs. 5 or more to Rs. 10. The net amount of tax deductible should be similarly rounded off to the nearest rupee.

(15) Attention is also invited to section 276B, where it is provided that if a person without reasonable cause or excuse fails to deduct or after deducting fails to pay to the tax as required under the provisions of Chapter XVII-B, he shall  be punishable :

(i)   in a case where the amount of tax which he had failed to deduct or pay exceeds Rs. 1 lakh with rigorous imprisonment for a term which shall not be less than six months but which may extend to seven years and with fine; and

(ii)   in any other case, with rigorous imprisonment for a term which shall not be less than three months but which may extend to three years and with fine.

4. While making the payment of tax deducted at source to the credit of the Central Government, it may kindly be ensured that the correct amount of income tax and surcharge is recorded in the relevant challan. It may also be ensured that the right type of challan is used. New colour band challans are being introduced with separate numbers. The relevant challan for making payment of tax deducted at source from salaries is No. 9 with “blue colour band”. Along with this colour band challan, old challan forms will also continue to be used. The old challan form numbers is ITNS 39. Wherever, the amount of tax deducted at source is cred­ited to the Central Government through book adjustment, care should be taken to ensure that the correct amount of income-tax and surcharge is reflected therein.

5. The instructions are not exhaustive and are issued only with a view to helping the employers to understand the various relevant provisions. Wherever, there is a difference of opinion, a refer­ence should always be made to the provisions of the Act, and the relevant Finance Act through which the changes in the tax struc­ture are made.

Circular : No. 278 [F. No. 275/12/80-IT (B)], dated 26-8-1980.