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PF contributions and 89(1) relief

Q: I have received arrears of salary from January 1, 1999 to July 31, 2001 in August 2001. While calculating tax relief under Sec. 89(1), my auditor has taken into account the PF contribution from arrears deposited in the year of receipt to the respective years for calculation of tax rebate in working out tax rate for respective years in calculation of relief under Sec. 89(1). But our accounts personnel insist that PF contribution for arrears should not be taken to respective years for the purpose of calculating tax rebate under Sec. 88, but should be taken in the current year only, when the arrear was received and deposits made. I request you to clarify which is the correct way of dealing the PF contribution for arrears for arriving at tax relief under Sec. 89.

A: The issue posed by the reader arises in cases where the Provident Fund contribution is made in the year in which the arrears are received. Even so, when the income is distributed on year-to-year basis, standard deduction as well as deduction under Sec. 80C (now tax rebate under Sec. 88) should also be distributed over the respective years. This was the view taken by the Income-tax Appellate Tribunal in R. J. Basu v Second ITO (1991) 37 ITD 49 (Mad) (SMC). There is yet no clarification from the Board or any decision of the High Court requiring a different interpretation. Hence, the claim made by the reader accords with the law. If the employer fails to agree with the same, refund has to be claimed from the Income-tax Department. The reasoning in the Tribunal's order for its view is that, it is settled law relating to statutory fictions, that, when the law enacts a fiction distributing the arrears to respective years, mind should not be allowed to be boggled down, when such fiction is sought to be extended to the other consequential matters.

S. Rajaratnam

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