Case Digest: TDS on Salary under Section 192 of the Income Tax Act

Income tax is a form of taxation in which the tax is collected on the basis of the income generated from a business. Tax Deducted at Source ( TDS ) is one of the modes of collecting tax in India at the very source of income, governed under the Indian Tax Act of 1961. TDS is simply an indirect method of collection of the tax that combines the concepts of “pay as you earn” and “collect as it earned.”

It is deducted before making payments on specified items such as salary, commission, rent, etc if the total amount exceeds the threshold limit. The deductions are made on the basis of the provisions of the Income-tax 1961 and the First Schedule to the Finance Act 1997. Section 190- 194 of Chapter XVII of the income tax act 1961 defines the term TDS and its variants.

As per section 190: Notwithstanding that the regular assessment in respect of any income is to be made in a later assessment year, the tax on such income shall be payable by deduction or collection at source or by advance payment or by payment under sub-section (1A) of section 192, as the case may be, in accordance with the provisions of this Chapter. It is the deductor’s responsibility to deduct TDS before making the payment and deposit the same with the government, in order to keep the revenue source stable for the govt. TDS must be deposited to the government by the 7th of the subsequent month. TDS helps in the prevention of tax evasion. The following are the important income that are applicable to Tax;

SECTION 192 of the Income Tax Act SALARY Section 192 states that “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 based on the rates in force for the financial year in which the payment is made, on the estimated income of the assesse under this head for that financial year”.

Salary means the fixed regular payment made by an employer to the employee for the works performed by the employee. TDS on salary is deducted before the actual payment at rate based on the income slab, since the taxable income of employees differs, different rates are charged as per the income they earned.

ITC LIMITED GURGAON vs COMMISSIONER OF I.T. (TDS) DELHI - 2016 TAXSCAN (SC) 101

The Supreme Court today, in an appeal filed by the ITC Ltd Gurgaon against the Commissioner (Appeals), New Delhi, declared that the amount of received by the Restaurant Employees as tips cannot be considered as “salary” for the purpose of Income Tax.

The Supreme Court in the lights of catena of decisions accepted the plea of the assessee and observed that tips would not amount to ‘profit in addition to salary or wages’ for the reason that in order to bring a particular income within the ambit of the term “salary” there must be an employer-employee relationship between the payer and the payee and such an element is absent in the instant case. Further, the appellants cannot be treated as assessee-in-default since they are outside the purview of section 192 of the Income Tax Act.

ITO vs Ratna Mukherjee - 2017 TAXSCAN (ITAT) 104

In a significant ruling, the Income Tax Appellate Tribunal, Kolkata bench has observed that section 194C of the Income Tax Act, 1961 is not applicable to the wages paid to labourers. The Tribunal opined that wages must be treated just like salary and are taxable on same basis and therefore, such payments are covered under section 192 of the Act.

While upholding the findings of the first appellate authority, the Tribunal held that “as per the provisions of section 17(1) of the Act salary includes wages and therefore conceptually there is no difference between salary & wages. Wages are treated just like salary and are taxable on same basis.wages in the instant case are covered under section 192 of the Act. Therefore the provisions of section 194C are not applicable.”

EIH Ltd. vs ITO - 2017 TAXSCAN (ITAT) 103

In a recent order of Income Tax Appellate Tribunal (ITAT), Delhi has reiterated that, Tax Deduction at Source (TDS) cannot be deducted from the Tips received by Hotel employees.

The Tribunals observed that, the material facts continue to remain the same the assessee in the facts as they stand cannot be said to be in default of the provisions of Section 192 of the income Tax Act, 1961 as there was no liability of the assessee to deduct TDS under the said provision on the tips recovered from the hotel guests”.

 The Tribunal also noted that, Since interest under section 201(1A) of the Income Tax Act can only be levied only a person who is declared as in assessee is default the question of interest does not arise. Accordingly in the face of the clear statement of law as settled by the Apex Court, the impugned order cannot be upheld.

Union of India vs The Society of Mary Immaculate - 2019 TAXSCAN (HC) 109

A two-judge bench of the Madras High Court has held that the provisions of the Income Tax Law are apolitical and areligious in character, and salaries and grants-in-aid to nuns and missionaries are liable to attract tax deducted at source (TDS) under the Income Tax Act.

The Income Tax Department instructed the concerned authorities of the State Government to deduct income tax at source on the payment of salaries made to these Teachers, nuns, etc. along with other Teachers also who are employed in such Schools and consequently, the relevant Instructions of the Income Tax Department in this regard deserve to be quashed. The bench also held that there is no iota of doubt that the provisions of the Sections 15 and 192 of the Act have nothing to do with religion or any other special status of the person receiving the income described to be salary by the payer of the same.

The Income-tax Officer(TDS) vs Mahatma Gandhi University - 2019 TAXSCAN (ITAT) 106

The salary paid to the employees of the University would not be subject to Tax Deduction at Source ( TDS ) as the university can be deemed as a ‘State’, ruled the Income Tax Appellate Tribunal (ITAT), Cochin.

The department claimed that section 192(2A) of the Income Tax Act, for TDS purposes, has clearly mentioned an employee of the University separately from a Government servant. The Tribunal observed that the salary, pension and retirement benefits are paid from the consolidated fund of the state government and the grant for payment of salary and retirement benefits are provided by the Legislature through the budget of the State.

Principal Sri Sathya Sai College for Women vs The ITO - 2019 TAXSCAN (ITAT) 105

The Income Tax Appellate Tribunal (ITAT), Jaipur has held that the salary paid to teachers, lectures and staff by the college would not amount to the fee for technical services and the same is subject to TDS under Section 192 of the Income Tax Act.

The Tribunal noted that the month-wise salary sheet was also prepared by the college on the basis of the attendance register of the employees. The salary was paid to the employees and due taxes are being deducted u/s 192 of the I.T. Act, 1961.Tax on the salary paid to them was correctly deductible u/s 192 of the Act. I also found that in order to establish employee and employer relationship between the college teachers/lecturers/staff, the assessee also produced salary registers and appointment letters before the lower authorities,” the Tribunal said.

M/s. Boeing India Pvt. Ltd. vs ACIT - 2020 TAXSCAN (ITAT) 116

The Income Tax Appellate Tribunal (ITAT), Delhi Bench deleted the disallowance under Section 40(a)(i) as the payments were not chargeable to tax as employees of Associated Enterprises (AEs) working for taxpayers.

The coram consisting of Anil Chaturvedi and Kuldip Singh held that when the payment to the non-resident entity is in the nature of payment consisting of income chargeable under the head ‘salary’ the taxpayer does not have any tax withholding applications under section 195 of the Act. So, when the salary is subjected to TDS under section 192 of the Act, section 195 has no application.Therefore, the ITAT ordered that the addition made by the AO and confirmed by the CIT(A) on account of disallowance under section 40(a)(i) of the Act is not sustainable in the eyes of law and hence ordered to be deleted.

In Re: M/s. Clay Craft (India) Pvt. Ltd. - 2021 TAXSCAN (AAAR) 120

The Rajasthan Appellate authority of Advance Ruling (AAAR) ruled that the Director’s remuneration declared as Salaries and subjected to TDS are not taxable.

The coram consists of Pramod Kumar Singh and Dr. Preetan B. Yashwant ruled that if any, paid by the appellant to the independent directors or those directors who are not the employee of the appellant is taxable in hands of the appellant, on a reverse charge basis. The AAAR further clarified that the part of Director’s remuneration which are declared as Salaries in the books of the appellant and subjected to TDS under Section 192 of the Income Tax Act, are not taxable being consideration for services by an employee to the employer in the course of or in relation to his employment in terms of Schedule III of the CGST Act, 2017.

THE PROVINCIAL SUPERIOR vs THE UNION OF INDIA - 2021 TAXSCAN (HC) 598

The Kerala High Court while answering to the 49 appeals filed by religious congregations, nuns, and priests including the Provincial Superior, Nirmalrani Provincial House, Idukki held that salaries paid to Nuns and Priests are liable for tax deduction at source.

The division bench of Justice SV Bhatti and Justice Bechu Kurian Thomas observed that it is the statutory duty of the person paying any income as salary to another, to deduct, at the time of making the payment, income tax at the rates in existence. None of the provisions provides an exemption for any category of persons, based on their nature of vocation or occupation. Section 192 of the Act obliges every person who makes a payment under the head ‘Salaries’ to deduct tax at source at the rates prescribed without fail.

Pr. Commissioner of Income Tax-10 VS Indofil Industries Ltd  - 2022 TAXSCAN (HC) 139

The Bombay High Court has held that the department cannot make disallowance under section 40(a)(ia) of the Income Tax Act on the failure of the assessee to deduct TDS if employee’s commission is shown as a part of salary income.

The division bench of Justice Amit B.Borkar and Justice K.R.Shriram has ruled that section 192 of the said Act, unlike other TDS provisions, requires deduction of tax at source under the head “Salary only at the time of payment and not otherwise.” The court has said, “the tribunal has not committed any perversity or applied incorrect principles to the given facts and when the facts and circumstances are properly analyzed and the correct test is applied to decide the issue at hand, then, we do not think that questions, as pressed, raise any substantial question of law.”

Suryaji Shriram Patekar vs Assistant Commissioner of Income Tax - 2022 TAXSCAN (ITAT) 550

The Mumbai Bench of Income Tax Appellate Tribunal has held that the assessee can avail relief on terminal compensation since compensation received by the assessee as salary received in advance.

The Coram of Mr M. Balaganesh, Accountant Member and Mr Rahul Chaudhary, Judicial Member, by relying on the co-ordinate Bench decision of the same Tribunal in the case of Rajesh Shantaram Chavan vs. ACIT has held that “Compensation received by the assessee as only salary received in advance. Therefore, we direct the Assessing Officer to allow the claim of the assessee u/s. 89 read with Rule 21A of I.T. Rules. Accordingly, the appeal filed by the assessee is allowed”

PRINCIPAL COMMISSIONER OF INCOME TAX vs M/S BOEING INDIA PVT. LTD. - 2022 TAXSCAN (HC) 765

Section 195 of the Income Tax Act has no application once the nature of payment determined as salary and TDS has been made under Section 192, the Delhi High Court upheld the order of ITAT in deleting the addition under Section 192 read with section 195 of the Income Tax Act,1961.

It was observed that salaries paid to such personnel asMr Laser are taxable in India and they cannot be considered to be fees for technical services. Further, even as per Section 9 of the Act, the payment cannot be treated as fees for technical service. Explanation 2 to Section 9(1)(vii) gives the meaning of the expression “fees for technical services” as per which, inter alia, any consideration which would be the income of the recipient chargeable under the head “salaries”, then such payment will not be considered as fees for technical services. Thus, even as per the provisions of the Act, the payment in question cannot be treated as fees for technical services. Moreover, since it is paid as salary to Mr Laser, tax has been deducted under Section 192 of the Act.”

Indofil Industries Limited vs CIT-26 - 2023 TAXSCAN (ITAT) 438

The Mumbai bench of Income Tax Appellate Tribunal ( ITAT ) recently held that the commission given to the whole time director of the company was part of salary therefore which was subject to Tax deduction at source under section 192 of the Income Tax Act 1961.

The bench observed that the assessee is liable to deduct tax at source in respect of commission expenses payable to the whole-time directors under section 192 only, as the same shall form part of their salary payment only.

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