Continuity and Reform in Tax Relief for Irregular Income : Clause 157 of the Income Tax Bill, 2025 Vs. Section 89 of the Income Tax Act, 1961

Clause 157 Relief when salary, etc., is paid in arrears or in advance.

Income Tax Bill, 2025

Introduction

Clause 157 of the Income Tax Bill, 2025, proposes to govern reliefs available to taxpayers when salary, profits in lieu of salary, or family pension is received in arrears or advance, resulting in a higher tax incidence. This provision is a direct successor to Section 89 of the Income Tax Act, 1961, which, along with Rule 21AA of the Income-tax Rules, 1962, has long provided a framework for mitigating the adverse tax impact of such receipts. The legislative evolution, contextual necessity, and practical impact of these provisions are significant, especially in a legal regime where the timing of income receipt can disproportionately affect tax liability. This commentary examines Clause 157 in detail, analyzes its objectives, compares it with the existing legal framework, and discusses its implications for taxpayers and tax administrators.

Objective and Purpose

The principal objective behind Clause 157, as well as its predecessor Section 89 and associated Rule 21AA, is to ensure tax equity and fairness. The Income Tax law is based on the principle of taxation according to the ability to pay, which can be distorted when income that pertains to multiple years is received in a lump sum in a single year-either as arrears or as advance. Such receipts can push the taxpayer into a higher tax bracket, resulting in a higher effective tax rate than if the income had been taxed in the years to which it pertains.

The legislative intent is thus remedial: to grant relief so that taxpayers are not unjustly penalized due to the timing of salary, pension, or similar receipts. The provision also seeks to prevent double benefits, ensuring that relief is not granted where an exemption or deduction has already been claimed on the same income.

Historically, the need for such a relief mechanism arose from practical realities such as delayed salary payments, retrospective pay revisions, and instances where employees receive compensation for several years at once due to administrative or judicial reasons. The provision also addresses the scenario of advance payments, which can similarly distort the tax liability for the year of receipt.

Detailed Analysis of Clause 157 of the Income Tax Bill, 2025

1. Scope of Receipts Covered

Clause 157(1) specifies four categories of receipts that may trigger relief:

1. Arrear or advance salary
2. Salary for more than twelve months in any one tax year
3. Profits in lieu of salary (as per Section 18(1) of the proposed Bill)
4. Arrears of family pension (as defined in Section 93(1)(d))

This categorization is comprehensive, covering both employees and pensioners. The inclusion of 'profits in lieu of salary' and 'family pension' ensures that the relief is not limited to conventional salary but extends to analogous receipts, in line with the broadening definition of income from employment.

2. Trigger for Relief

The relief is triggered when the total income is assessed at a higher rate due to such receipts. The provision thus requires a causal link between the receipt in question and the higher tax rate. This is conceptually consistent with the principle that relief is warranted only when the taxpayer is disadvantaged by the bunching of income.

3. Application Process

Relief is not automatic; it is contingent upon an application by the assessee to the Assessing Officer. This procedural requirement ensures that only genuine cases are entertained and that the taxpayer substantiates the claim, typically by furnishing details of the relevant receipts and their allocation to earlier years.

4. Quantum and Manner of Relief

Clause 157 stipulates that the Assessing Officer shall grant "such relief, as prescribed." The quantum and computation of relief are thus left to be detailed in the rules, continuing the established practice u/s 89 and Rule 21AA. This approach allows for flexibility and administrative clarity, as the computation can be tailored to evolving tax rates and legislative changes without amending the principal Act.

5. Exclusion of Relief in Certain Cases

Sub-clause (2) provides that no relief shall be granted on any income for which deduction has been claimed u/s 19(1) (Table: Sl. No. 12) for any amount mentioned therein, for such, or any other, tax year. This anti-abuse provision ensures that taxpayers do not claim both a deduction and relief for the same income, thereby preventing double benefits.

6. Comparison with Section 89 and Rule 21AA

A comparative analysis with the existing Section 89 and Rule 21AA reveals both continuity and certain refinements:

a) Section 89 of the Income Tax Act, 1961

• Substantive Content: Section 89 provides relief when salary is paid in arrears or advance, or when salary for more than twelve months is received in a single financial year, or when profits in lieu of salary or family pension in arrears are received. The triggering condition is that the total income is assessed at a higher rate due to such receipt.
• Procedural Requirement: Relief is granted upon application to the Assessing Officer.
• Prescribed Relief: The quantum of relief is as prescribed, typically detailed in the rules.
• Proviso: Section 89 contains a specific proviso denying relief for amounts received on voluntary retirement or termination if an exemption has already been claimed u/s 10(10C), thus preventing double benefits.

Comparison: Clause 157 largely mirrors Section 89 in substance and structure. The primary difference lies in the cross-referencing of the deduction exclusion: Clause 157(2) refers to Section 19(1)(Table: Sl. No. 12), whereas the existing law refers specifically to exemptions u/s 10(10C). This may reflect a restructuring of the deduction/exemption framework in the new Bill.

b) Rule 21AA of the Income-tax Rules, 1962

• Rule 21AA prescribes the furnishing of particulars (in Form 10E) for claiming relief u/s 89. The rule applies to government servants and employees in specified organizations.
• It requires that the particulars be furnished to the person responsible for making the payment (i.e., the employer or disbursing authority), who is in turn responsible for deducting tax at source u/s 192.

Comparison: While Clause 157 itself does not prescribe the procedural aspects, it delegates the computation and manner of relief to the rules, which are expected to mirror or update Rule 21AA. The requirement to furnish particulars is a key compliance step, ensuring proper verification and preventing abuse.

7. Key Ambiguities and Issues

While the structure of Clause 157 is broadly consistent with established principles, certain ambiguities or interpretative issues may arise:

• Definition Cross-references: The definitions of 'profits in lieu of salary' and 'family pension' are linked to sections in the proposed Bill. It is crucial that these definitions align with or improve upon the clarity provided in the existing law.
• Computation of Relief: As with Section 89, the actual computation is left to the rules. Any changes in the computation formula (for example, in the allocation of income to prior years or the manner of calculating the notional tax) can significantly affect the quantum of relief.
• Procedural Aspects: The application process, documentation, and time limits for claiming relief are not detailed in Clause 157. These aspects will be critical for effective administration and taxpayer compliance.
• Interaction with Other Provisions: The exclusion in sub-clause (2) is linked to deductions u/s 19(1). The scope and content of this deduction will need to be carefully examined to avoid unintended overlaps or exclusions.

Practical Implications

The practical significance of Clause 157, as with its predecessor, is substantial for the following stakeholders:

• Employees and Pensioners: The provision is a lifeline for employees and pensioners who receive salary or pension in arrears (e.g., after pay commission implementations, court orders, or administrative delays). Without such relief, they would face excessive tax burdens in the year of receipt.
• Employers and Disbursing Authorities: The obligation to collect and verify particulars (as per Rule 21AA/Form 10E) places a compliance burden on employers, who must ensure correct TDS deduction and reporting.
• Tax Administrators: The Assessing Officer's role in verifying claims and granting relief is crucial. The clarity and objectivity of the prescribed rules will determine the ease of administration and the potential for disputes.
• Policy Makers: The provision reflects a policy choice to balance revenue interests with tax equity. Any changes in the scope, computation, or exclusions can have significant fiscal and social impacts.

Compliance Requirements: Taxpayers must maintain records of salary/pension receipts, the periods to which they pertain, and any deductions/exemptions claimed. Timely and accurate submission of particulars is essential to avoid denial of relief.

Procedural Impact: The process is application-based, requiring proactive engagement by the taxpayer. The absence of automatic relief means that lack of awareness or procedural lapses can result in loss of benefit.

Comparative Analysis: Clause 157 vs. Section 89 and Rule 21AA

1. Substantive Provisions

Both Clause 157 and Section 89 provide relief in cases where salary, profits in lieu of salary, or family pension is received in arrears or advance, resulting in higher tax rates. The scope of receipts is largely identical, though the specific cross-references to definitions and deduction provisions differ, reflecting the new legislative structure.

The anti-abuse exclusion in Clause 157(2) is similar in intent to the proviso in Section 89, though the reference is now to Section 19(1) rather than Section 10(10C). This may indicate a harmonization or re-categorization of deductions and exemptions in the new Bill.

2. Procedural Mechanism

Both regimes require an application by the taxpayer, with the manner and computation of relief left to be prescribed in the rules. Rule 21AA continues to play a pivotal role in operationalizing the relief mechanism, requiring the furnishing of particulars in Form 10E to the employer/disbursing authority.

3. Computation of Relief

Under the current regime, the relief is computed by allocating the arrears/advance to the years to which they pertain, recalculating the tax for those years, and comparing the aggregate with the tax payable in the year of receipt. The difference is allowed as relief. It is expected that the new rules under Clause 157 will retain this methodology, though any changes could materially affect the quantum of relief.

4. Exclusions and Limitations

Section 89 specifically excludes relief for amounts received on voluntary retirement or termination where an exemption u/s 10(10C) has been claimed. Clause 157 mirrors this exclusion, though the reference is now to deduction u/s 19(1), which may be broader or differently structured in the new Bill.

5. Compliance and Documentation

The requirement to furnish particulars (Form 10E) and the role of the employer/disbursing authority in verifying claims are retained. This ensures a check against fraudulent or inflated claims but also imposes a compliance burden on both taxpayers and employers.

6. Potential Areas of Divergence

The main area of potential divergence lies in the cross-references to other sections (definitions and exclusions) and the rules that will prescribe the computation and procedural aspects. Any changes in these areas could result in material differences in the scope and quantum of relief.

Conclusion

Clause 157 of the Income Tax Bill, 2025, represents a continuity of the legislative intent and substantive relief provided under Section 89 of the Income Tax Act, 1961, and Rule 21AA of the Income-tax Rules, 1962. The provision remains a critical safeguard against the inequitable tax impact of lump-sum receipts of salary, profits in lieu of salary, and family pension in arrears or advance. The delegation of computation and procedural details to the rules ensures flexibility and administrative efficiency, though it places a premium on clear and timely rule-making.

The comparative analysis demonstrates that while the structure and objectives remain aligned, the specific references and exclusions may evolve to fit the restructured legislative framework. Stakeholders must closely monitor the rules to be framed under Clause 157 to understand the precise computation and compliance requirements. Potential areas for reform include simplification of the application process, greater automation of relief computation, and enhanced taxpayer awareness to ensure that relief is not denied due to procedural lapses.

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Full Text:

Clause 157 Relief when salary, etc., is paid in arrears or in advance.

 

 

Dated: 22-4-2025