View Full Version : Spreading Arrears to previous years

20-10-2008, 07:06 AM
Hi all

I am to receive a total SPC arrears of Rs.1.5 lakhs for the period from 01-01-2006 to 31-08-2008. 40% will be received in this year, 2008-2009 and 60% in next year 2009-2010. If I include the arrears to be received in next year to my next years' income(calculating with 20% and 24% DA), my total income for 2009-2010 will exceed 5 lakhs.

Is there anyway to reduce the tax payment?

my income for the previous years are as under:

2005-2006 - 2,00,000 ( before applying any deductions)

2006-2007 - 2,25,000 ( before applying any deductions)

2007-2008 - 2,50,000 ( before applying any deductions)

My estimate for the next two years are as under:

2008-2009 - 3,25,000 + arrears 60,000

2009-2010 - 4,25,000 + arrears 90,000

Arrears split-up for the years:

2005-2006 - 10,000

2006-2007 - 50,000

2007-2008 - 55,000

2008-2009 - 35,000

Can I spread the income from arrears from 01-01-2006 to 28-02-2006 to the year 2005-2006 ?

Can I spread the income from arrears from 01-03-2006 to 28-02-2007 to the year 2006-2007

Can I spread the income from arrears from 01-03-2007 to 28-02-2008 to the year 2007-2008 ?

As the arrears are received in installments, what will the effect of the same on the spreading ?

I request the learned members to answer this question, I am sure there are many of us with similar doubts.. Thanks in advance...

21-10-2008, 02:48 PM
Govt has disturbed the application of Rule 89 (spreading the income to the years it belong to) by disbursing in two financial years. I hope some amendments will be in the offing during the presentation of Budget/finance bill.

badri mannargudi
11-11-2008, 08:11 PM
Interesting topic.
But I restrict myself to the limited lamentation of my learned friend S.Sjee reg the splitting the arrears to two years.
In the instant (querist's)case, I do not see any problem.If the querirst finds it advantageous, he may seek to get the advantage by claiming Rs.10 T for 2005-06 and 50T for 2006-07.
This is based on the principle known as "first in first out". Whenever there is no way of finding which month's raw materials were used for the manufacture of final products, we adopt this method of "First in First out" principle.
The quesrist may use this principle, if it suits him. The Incometax officer, in my opinion, will have no reason to raise objection on this methodology.
With Regards'

11-11-2008, 10:16 PM
Imho, the spreading of arrears to the respective years can be made for both the installments [ie., two times, 40% first time this year and 60%second time next year] for the respective years and the tax implication will be the same when compared to spreading the whole 100% & if you pay the tax this year itself. Btw, income tax dept. Had already clarified that the balance 60% arrears is not to be considered as due this year and hence you may also act accordingly. Hope this helps.

12-11-2008, 08:01 PM
I concur with REX88!

The arrears of 40 % received this year is to be split into components of 2006-07, 2007-08 and 2008-09 (FY) and appropriate the same to the years to which it corresponds.

Same way for 60 % next year.

In all probability the cases of pb-3 and pb-4, it wont make any difference and infact it may lead to higher income tax as the tax regime is declining trend. unlike during the previous pay commission arrears when we could save lot of income tax by spreading. Then the tax was systematically increasing year after year.

However those who are on the other side of 5 lakh taxable income, when surcharge become due for the full income tax, spreading may come to their rescue. (pb-4, generally)

Even in case of pb-1, pb-2 the spreading of arrears may help to bring the tax liability to nil.


05-12-2008, 05:08 PM
Following circular may clear the issue :-

CIRCULAR NO. 9 /2008 [F.No.275/192/2008-IT(B)]
NEW DELHI, the 29th September, 2008
Page 39
The Implementation Cell of the Department of Expenditure, Ministry of Finance vide its
Office Order F. No. 1/1/2008-IC dated 30th August, 2008 has stated at Para 2(v)
“Bills may be drawn separately in respect of the arrears of pay and allowances for the period
from January 1, 2006 to August 31, 2008. The aggregate arrears, computed after deduction
of subscription at enhanced rates of GPF and NPS with reference to the revised pay, may be
paid in two installments, the first installment being restricted to 40% of the aggregate arrears.
DDOs/PAOs will ensure that action is taken simultaneously in regard to Government’s
contribution towards enhanced subscription. Orders in regard to the payment of the second
installment of arrears will be issued separately.”
A number of representations have been received by CBDT seeking clarification as to
whether TDS need to be deducted on 40% of arrear to be paid during 2008-09 or on the entire
arrear payable to the government servant. The matter has been examined by the Board; the issue
is clarified as given below.
Salary is as defined under Section 15 of Income Tax Act’61 :-
(a) any salary due from an employer or a former employer to an assessee in the previous
year, whether paid or not;
(b) any salary paid or allowed to him in the previous year by or on behalf of an
employer or a former employer though not due or before it became due to him;
(c) any arrears of salary paid or allowed to him in the previous year by or on behalf of
an employer or a former employer, if not charged to income-tax for any earlier
previous year.
2. It is clear from the Office Memorandum issued by the Department of
Expenditure that 60% of the pay arrears neither fall in the category of due nor are
allowed. Moreover, Section 192 of Income Tax Act’61, inter alia, requires any person
responsible for paying any income chargeable under the head “Salaries” to deduct
income tax on the amount payable at the stipulated rate at the time of payment.
Therefore it is clarified that income tax at source would be deducted u/s 192 only from
the arrears of salary actually paid during FY 2008-09. On the balance, tax would be
deducted during the financial year in which these pay arrears are actually paid.

Full circular available on www.rrewa.org under the feature “Finance/ Income tax”