Procedure for granting relief under section 89(1) of the Income-tax Act, 1961

Circular No. 331
Dated 22/3/1982

To
All the Commissioners of Income-tax.
Sir,
Subject: Procedure for granting relief under section 89(1) of the Income-tax Act, 1961. 
Section 89(1) of the Income-tax Act, 1961, 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 5 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 the 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 descripttion 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 r. 21A(2) to r. 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.
5. The contents of the above circular may be brought to the notice of all officers working in your charge and in particular to those working in salary circles.
Yours faithfully,
(Sd.) V.B. Srinivasan,
Secretary, Central Board of Direct Taxes.