This article explains the rationale for Section 17 (3) of the 1995 Income Tax Act, ie income from salaries.
What regulates § 17 Abs. 3 EStG?
Any payment received or due in addition to your employer’s salary or wages; is profit instead of salary. Section 17 (3) EStG defines profit instead of salary as follows;
- the amount of compensation owed or received by an appraiser from his or her employer or previous employer; at or in connection with the termination of his employment relationship or the change in the relevant terms and conditions;
- every payment [other than any payment referred to in clause (10), [clause (10A),] [clause (10B),] Clause (11), [clause (12) [, clause (13)] or Clause (13A)]of Section 10]owed to, or received by, an appraiser from an employer or previous employer, or from a pension fund or other fund [* * *]to the extent that it is not contributions from the assessor or[interestonsuchcontributionsoranamountreceivedaspartofaKeymaninsurancepolicyincludingthesumthathasbeenassignedasabonusforthispolicy[ZinsenaufsolcheBeiträgeodereinenimRahmeneinerKeyman-VersicherungspoliceerhaltenenBetrageinschließlichderSummehandeltdiealsBonusfürdiesePolicezugewiesenwurde[interestonsuchcontributionsoranysumreceivedunderaKeymaninsurancepolicyincludingthesumallocatedbywayofbonusonsuchpolicy
Income from salary
Compensation owed / received by the employer / former employer from an appraiser; as a result of loss / termination / withdrawal from the employment relationship.
The compensation was accrued or received due to a change in employment conditions.
When the company takes out Keyman insurance on behalf of the assessee; If the appraiser received money as a result of this policy, that amount is taxable.
If the employee received a payment from the employer / former employer during the pre- / post-termination, this is taxable under this heading.
Any other amount received from the employer will be treated as profit in lieu of salary, unless; and until that particular amount is expressly exempted under a section of the Income Tax Act.
In order to bring the tax liability under the term “salary”, an employer-employee relationship must be established. In short, when a transaction needs to be scrutinized “salary income”; for the purpose of taxation. It is mandatory to prove that the transaction was the result of; Employer-employee or master-servant relationship.
In Dharan Chemicals Ltd. v. Saurashtra State; Court ruled that the prima facie test for the relationship; is the existence of the master’s right to supervise and control the work of his servant.
In Summons v Heather Laundry Company, the court ruled that greater control of power will exist when a service contract is in place. When there is greater independence, there is a greater chance of professional service.
In the Laxminarayan v. Hyderabad government, the court ruled that the status of an agent is very similar to that of an independent contractor. He basically works and earns commission / remuneration based on his work. He does the job his own way and income is not counted under the heading “Income Below Salary”.
In the CIT v Navtoj Bai Tata case, the court ruled:
- Having only one office does not prove the existence of an employer-employee relationship.
- A director may hold office of his own but is not an employee or employee of the company
- The income of the director is taxable according to § 56 EStG. (Income from other sources)
In the Ram Prasad v CIT case, the court ruled that when a contractual relationship is established between the company and the manager; His earnings are taxed under “salary”.
Advocate General’s income
In the CIT v Govinda Swaminathan case, the court ruled that the Advocate General is not a government employee. It serves a professional service. He is in office at the request of the governor. His earnings are taxable under the heading “Profits and Profits from Business and Occupation”.
In Justice Nandan Agarwala v UOI, the court ruled that the judge’s salary under the heading “Salary” is taxable even if there is no judge’s employer. Articles 125 and 221 of the Indian Constitution express their income as salary.
Income from MLAs, MPs, etc.
The income of MLAs, MPs, etc. falls under the heading “Income from other sources”.
Film actors / actresses
The employment of actors and actresses is based on contracts. Your employment is of particular duration.
In the case of CIT against Ms. Durga Khote, where the actress signed various contracts for the year in question. Under the terms of the contract, it would be relieved of all obligations when the terms of the contract expire. The court ruled that because of the nature of the job, she will tax her professional income rather than salary.
Difference between salary or out of business
The question of whether a certain income comes from “salary” or “income from companies” is not always free from difficulties. Sometimes the line between “business” and “employment” becomes quite thin and it must be determined from the material available whether the relationship between the evaluator and the person from whom the money is received is that of a servant and master or that of two independent contracting parties.
The basic test
Several tests were specified to aid in deciding the question. There are three basic concepts in a service contract that need to be considered. A servant does the work for his master, and so the work he does is not his own.
Control and supervision must necessarily come from the master, and the servant is required to work according to his instructions. The employee works for a remuneration that can be paid in a lump sum or on a commission basis or in part on one side or the other. However, since the relationship between the captain and servant is the result of a contract, some or all of the above conditions can be changed by mutual agreement.
But the basic idea that a servant does the master’s work for a fee and under the master’s supervision or control is always there. On the other hand, it cannot be said that one person who runs a business does another person’s work; He has an interest in the business and can be described as his own work.
He is entitled to profit and liable for losses, and he is also free to do his job in his own way. Even in the case of a business agreement, it is possible to contractually change all or some of these terms and then the question of whether it is a business activity or a service contract becomes more difficult to decide, taking into account all the facts and the entirety of the circumstances
What is § 17 EStG?
Section 17 (1) EStG contains an inclusive and non-exhaustive definition of “salaries” including (i) wages (ii) pensions (iii) Tip (iv) Fees, commissions, services or profits instead of the salary (v) Salary advance .. etc.
What are profits instead of salaries?
Profit instead of salary is part of Salary income. The employer makes this payment to his employee in instead or in addition to his salary or wage. It is included in the gross salary and taxed accordingly under the heading income from salary.