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Conflict between Section 15 and Section 192 of the Income Tax Act

According to Section 15 of the Income Tax Act, the following income shall be chargeable to income tax under the head “Salaries”—

(a)  any salary due from an employer or a former employer to an assessee in the previous year, whether paid or not;

(b)  any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer though not due or before it became due to him;

(c)  any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer, if not charged to income-tax for any earlier previous year.

Section 15 states that salary should be taxed whenever it is due or paid, whichever is earlier. For example, let us assume that an organization pays salary to its employees on the first day of each month for the month which ended the previous day. One could then state that the salary for a month falls due on the last day of the month while the date of payment is the first day of the next month. As per Section 15, the salary should be taxed on the basis of the tax rates prevailing on the last day of the month, which is the date of salary accrual.

Now let us take a look at Section 192 which states the rules for tax deducted at source (TDS).

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.

Section 192 states that TDS on salary shall be deductible at the time of salary payment and the TDS amount shall be “computed on the basis of the rates in force for the financial year in which the payment is made.”

There is no lack of clarity on the letter of Section 192 when read on a standalone basis. However, given that organizations deduct the entire tax on salary by way of TDS unlike deduction of a fixed rate of say, 10% as tax on payments pertaining to professional services, Section 192 should be in absolute consonance with Section 15.

Where is the conflict?

Many organizations pay salary in the first week of each month for the month ended the previous 30th or 31st. In such organizations, as per the letter of Section 192, the March salary paid in April will have to be taxed (for the purpose of TDS) as per the rates for the next financial year (starting April). This is because Section 192 states that the tax calculation should be as per the rates in force for the year in which the payment is made.

When the salary which accrues on 31-Mar is paid on 01-Apr, shouldn’t the TDS on salary not be as per the rates prevailing on 31-Mar? If yes, then how can TDS calculation be as per Section 192 which states that TDS should be calculated as per the rates prevailing on 01-Apr?

The way Section 192 is worded puts it in conflict with Section 15 of the Income Tax Act which states that taxability on salary arises whenever salary is due/accrued or paid, whichever is earlier.

Organizations typically tax salaries that accrue in March as per tax rates for that financial year ending March in accordance with Section 15, whether the salary is paid in April or later. If one goes by Section 192, as it is currently worded, such organizations can be viewed as deducting tax in contravention to Section 192.

Issues with Form 24Q filing for the last quarter

Let us assume that an organization pays March salary on 01-Apr and remits the TDS to the Income Tax Department on 07-May. How can the organization submit the salary and TDS details to the tax authorities?

In Form 24Q of the fourth quarter, the organization cannot state 01-Apr as the “Date of Payment/Credit” in Annexure I since 01-Apr lies outside the period of the last quarter. The organization can state the accrual date of 31-Mar as the “Date of Payment/Credit” and 07-May as the “Date of TDS Deposit”  in Annexure I. However, what if the Income Tax Department raises a demand for delayed TDS remittance with the argument that since the “Date of Payment/Credit” is 31-Mar, the TDS amount should have been remitted on or before 30-Apr instead of 07-May?

Also, the organization for obvious reasons, cannot show March salary in the first quarter Form 24Q of the next year.

Let us take another example, where salary accruing on 31-Mar is paid to employees on 01-May and consequently, TDS is remitted on 07-June. Given that 31-May is the last date for issue of Form 16, should the organization leave out March salary in the Form 16 or wait until 07-June, remit TDS and file Form 24Q for the fourth quarter and then make a delayed issue of Form 16?

It would help if the Income Tax Department illustrates these atypical situations and provides guidance for handling such situations.

The letter of Section 192, as it currently exits, fails the case of March salary paid in April.