STATE OF KERALA Vs. LILLY GEORGE

JUDGEMENT

(1.) These appeals are filed by the State Government challenging the decision of the learned Single Judge directing the State to recover tax deducted at source from the DA arrears paid to the respondent- employees and credit only the balance in their Provident Fund Account. The contention of the State is that though liability for payment of DA is approved by the Government, the scheme is not to release payment but to credit in the P.F. Account which is with the Government. However, contention of the respondents is that when salary in the form of DA arrears accrued to them, they are liable to include it in the salary income and are liable to pay tax which necessarily involves deduction of tax at source in terms of Section 192 of the Income Tax Act.

(2.) Government Pleader appearing for the appellants referred to the scheme of payment of DA arrears and submitted that DA arrears are paid with retrospective effect and the employees are not entitled to either payment in cash or are entitled to withdraw the same from PF Account to which it is credited. He has stated about the lock in period provided against withdrawal means that DA, though credited in the individual account of the employee, cannot be withdrawn within the time stipulated. We do not think the claim of the Government that the scheme of payment of arrears of DA by crediting the PF Account with lock in period affects the scheme of deduction of tax at source under Section 192 of the Act. In fact, State itself has no case that recovery need not be made in terms of Section 192 at the time of crediting the DA arrears in the PF Account of the employee concerned. In our view, Government rightly treated the credit of DA arrears in the individual account of the employee concerned as payment of salary in terms of Section 192. However, the mistake committed by the Government is only in making recoveries of tax for the arrears of DA paid to the account of the employees from the regular salary payable to them. What is required to be done under Section 192 is to deduct tax at source on the income disbursed by way of salary which includes DA arrears at the time of payment or credit in the employees' account and the recovery under Section 192 should be from the amount so paid or credited in the account. In fact, under Section 15 of of the Income Tax Act, "income" under the head "salary" includes any salary due, whether paid or not. In our view, the credit of DA arrears in the PF account, though with lock in period, amounts to payment and in any case atleast it amounts to salary declared as due to the employee and so much so, liability is there on the employee for payment of tax on the DA arrears so credited in the assessment year following. Therefore, State rightly decided to deduct tax at source and remit the same. However, recovery has to be necessarily made from the DA arrears credited and the employees are entitled to credit of only the net amount in the PF account after deduction at source. In other words, the tax portion of the DA arrears payable to each employee has to be paid in cash by State Government to Central Government towards TDS for each employee and certificate has to be issued to the employee concerned. The balance of course could be credited in the PF Account of the employee with lock in period against withdrawal. The learned Single Judge in this regard rightly held so and we see no merit in the Writ Appeals filed by the State by which State is canvassing the position contrary to the statutory provision under the Income Tax Act. Writ Appeals are consequently dismissed.