INCOME TAX

Circular No.46

Dated 14/9/1970

Expressions salary and year as used in clause (10) as it stood prior to its substitution by Finance Act, 1974 - Interpretation of

CLARIFICATION 1

1. Reference is invited to the Boards Circular No. 4-P(LVIII-22), dated 6-8-1964 [Clarification 2] on the above subject. Several representations have been received by the Board seeking clarification about the meaning of the term salary as used in section 10(10).

2. As was explained in that circular, salary would include only the periodical payments made to the employee by the employer as compensation for his services. Any payment made by the employer to the employee by way of allowances or perquisites, etc., is not to be taken into consideration as salary for the purposes of section 10(10). If, however, dearness allowance is merged with salary, it no longer remains dearness allowance but becomes salary and is then includible in the term salaries for the purposes of section 10(10).

Circular : No. 46 [F. No. 194/70-IT(A-I)], dated 14-9-1970.

CLARIFICATION 2

1. Clause (10) of section 10, inter alia, provides that the gratuity received by an employee from a private employer shall not be included in his total income to the extent the amount of such gratuity does not exceed one-half months salary for each year of completed service or 15 months salary or Rs. 24,000, whichever is the least. Under this clause, a months salary is to be calculated on basis of the average salary of the employee for three years immediately preceding the year in which the gratuity is paid.

This circular explains the import of the expressions salary and year used in the aforesaid clause.

2. The Income-tax Act does not contain a general definition of the word salary. The definition contained in section 17 is only for the purposes of sections 15, 16 and 17. Similarly, certain other provisions of the Income-tax Act, and the Rules [e.g., rule 2(h) of Part A of the Fourth Schedule to the Act and clause (2) of the Explanation to rule 3(b) of the Rules], contain a special definition of salary for specified purposes. These definitions are not relevant for the interpretation of the expression salary occurring in section 10(10). The said expression is also not defined in the General Clauses Act, 1897. Hence, the expression has to be given its ordinary natural meaning as understood in the English language. In this view of the matter, salary as contemplated by section 10(10) would include only the periodical payments made to the employee by the employer as compensation for his services. Any payments made by the employer to the employees by way of allowances, or perquisites or any payment in the nature of gratuity or bonus should not, therefore, be taken into consideration as salary for the purpose of the aforesaid provision.

3. The word year is not defined in the Income-tax Act and, therefore, its meaning has to be construed in accordance with its definition in section 3(66) of the General Clauses Act, 1897. According to the said definition, unless there is anything repugnant in the subject or context, years means a year reckoned according to the British calendar, i.e., the calendar year commencing from January 1 and ending on December 31. The word year, wherever it occurs in clause (10) of section 10 (except where it is used therein for the first time in the expression year of completed service), should therefore, be construed to mean each calendar year and not every period of twelve months reckoned from the date of the employees joining service with the employer. Thus, the expression three years in that clause refers to three calendar years immediately preceding the calendar year in which the gratuity is paid to the employee. However, the word year used in the clause for the first time in the expression each year of completed service is not used as simpliciter but in relation to the service rendered by the employee. In this context, the expression each year of completed service is to be construed to mean a period or periods of twelve months service rendered by the employee, reckoned from the date on which he joined service with his employer.

Circular : No. 4-P(LVIII-22) [F. No. 1(2)/63/TPL], dated 6-8-1964.