Relief u/s 89

This query is : Open

LAKSHMI P R (Querist)
Follow

11 December 2009 Ref: section 89 l RELIEF WHEN SALARY ETC., IS
PAID IN ARREARS OR IN ADVANCE

628. Scope of relief under the section in five situations explained

1. Section 89(1) authorises grant of relief in a case where an employee receives salary in arrears or in advance or has received in any financial year salary for more than twelve months, a payment which under the provisions of section 17(3)(ii) is a profit in lieu of salary. The effect of such increase is that the income will be assessed at a higher rate than it otherwise would have been assessed and it is for this reason that section 89(1) authorises relief to be allowed. The relief is to be allowed in terms of rule 21A of the Income-tax Rules, 1962.

2. Rule 21A(1) enumerates the following five different situations wherein the assessees will be entitled to relief (four of these are specific situations while the fifth is a residuary one) :

a. salary being received in arrears or advance;

b. where the payment is in the nature of gratuity in respect of past services extending over a period of not less than five years is received;

c. where the payment is in the nature of compensation received by the employee from his employer or former employer at or in connection with termination of his employment after continuous service of not less than three years and where the unexpired portion of the term of employment is also not less than three years;

d. where the payment is in the nature of commutation of pension;

e. where the payment is not covered by the description given in (a) to (d) above.

The relief is to be worked out in the first four situations in accordance with the specific modes described in rule 21A (2)(a) to (d).

3. The authority to grant relief in the four specific cases is the Income-tax Officer assessing the employee. In the residuary case, it is Central Board of Direct Taxes.

4. The relief under section 89(1) is to be given in the assessment in which the extra payment by way of arrears, advance, etc., is taxed. The mode of granting relief spelt out in rule 21A(2) to 21A(5) would show that in all the four different cases the exercise of giving relief is initiated by bringing to tax the whole of the extra amount in the assessment for the assessment year relevant to the year of receipt. Basically, the relief under section 89(1) is arithmetical. It involves finding out of two rates of tax. The first is the rate of tax applicable to the total income including the extra amount in the year of receipt. The second is finding out the rate by adding the arrears to the total income of the years to which they relate. For this purpose the assessee should be asked for a true and authentic statement of the total income of the earlier years to which the arrears pertain There is no warrant for issuing a notice under section 148 or calling for returns of income of the earlier years.

Circular : No. 331 [F. No. 174/102/79-IT(A-I)], dated 22-3-1982.

From this Circular, do you agree that if arrears is taxed in the year when it was due but not paid, 89 relief can be claimed in that year when the arrears was taxed on due basis. Is there any amendment circular for this in the later years. Please reply.

Murtaza I Bhagat

Murtaza I Bhagat (Expert)
Follow

12 December 2009 thanks

M Prabhakar Menon

M Prabhakar Menon (Expert)
Follow

12 December 2009 Yes u will have to re-compute the income for each of the years the arrears relate to and if u find the tax paid is more u can claim refund under this section

Upgrade to CAclubindia Pro. Subscribe Now!

LAKSHMI P R

LAKSHMI P R (Querist)
Follow

13 December 2009 Sir
One of my client had included 40% arrears in the year 2008-09 on due basis (received only in April 2009) and had claimed 89 relief on the arrears income in the same year. Now the internal auditors are raising objection for 89 relief claim stating that 89 relief can be claimed only on arrears received.

Is not my client right in claiming 89 relief in the year when the arrears was taxed :Based on the Circular : No. 331 [F. No. 174/102/79-IT(A-I)], dated 22-3-1982.Please tell me whether there is any objection in claiming the relief.