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Payment of arrears in instalments

Arrears to the extent of 40 per cent were released initially by the Tamil Nadu Government to its employees in 1998. The Government retained the balance of 60 per cent on a directive that it would be released later after five years with interest due as per PF Rules. The G.O. No.413 of 2004 ordered release of the balance of 60 per cent pay arrears with interest calculated up to March 31, 2003, in three equal instalments during financial years 2004-05 and 2006-07. But due to administrative exigencies, the entire balance is being released only in 2006-07 (all the three instalments).

Whether an assessee is eligible to claim 89(1) relief for those arrears pertaining to previous years 2004-05 and 2005-06, notwithstanding the actual period of arrears?

Salary income like any other income is taxable on an accrual basis, so that whatever is received and receivable during the year alone will be taxable in that year. Where the amount itself is payable in instalments, it is only on the date of each such instalment that the right to receive the same arises, since the amount is also not receivable or received before that date. As and when the amount is received, it has the character of arrears, so that it is eligible for spread over under Section 89 read with Rule 21A. Since the arrears are identifiable as regards the period to which they relates, the amount now received will be distributed between the years to which they relate. If the tax on receipt basis, including the arrears is "x", and the tax additionally payable, if they are treated as relating to respective years is "y", difference between x and y is the relief that will be allowed under Sec. 89 in the current assessment without disturbing the past assessments.

There is, no doubt, whatsoever, that such relief being mandatory at the option of the assessee, will have to be allowed. If it has not been allowed at the time of tax deduction at source, the assessee will have to ask for refund by filing return for the year in which the arrears were received along with the necessary particulars for the years to which the arrears related in the prescribed Form 10E. As for the interest element, it also has the character of salary and such interest can also be spreadover to the years to which it relates at the option of the assessee.

Since the period to which the salary relates is available, it has to be only for those years and the normal rule of spread over for three earlier years as in the case of gratuity amount will have no application.

S. RAJARATNAM

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