2013 (4) TMI 417 - AT - Income Tax

Non Deduction of TDS on payment for professional fees as towards directors salary - Disallowance u/s 40(a)(ia) invoking the provisions of Section 194-J - Held that - The statute has clarified that the remuneration to director cannot be termed as salary till such time the employee employer relationship exists which was not to be insofar as the Directors on the approval of the share holders cannot be said to be for the professional or technical services to the assessee when the disallowance of payments to them cannot be after invoking the provisions of Chapter XVIIB. The assessee had claimed these payments as expenditure and therefore, it was not the AO to verify the nature of payments to be subjected to the provisions of Chapter XVIIB insofar as the payments authorised to self cannot be termed as payment of salary. Therefore, there was no confusion insofar as the assessee had not deducted tax at source under the provisions of Chapter XVIIB but claimed the payment by whatsoever name called but has been disallowed u/s.40(a)(ia) has to be specifically now considered w.e.f. 1.7.2012 as per the clarification as pointed out by the assessee. Disallowance made u/s.40(a)(ia) for the impugned AY is directed to be deleted - in favour of assessee.

Summary

Issues:
Disallowance of Director's remuneration under Section 40(a)(ia) for non-deduction of TDS under Section 194J.

Analysis:
The appellant, a company, contested the disallowance of Rs. 16 lakhs as Director's remuneration under Section 40(a)(ia) due to non-deduction of TDS under Section 194J. The Assessing Officer disallowed the payment as TDS was not deducted on the amount paid as Director's salary. The appellant argued that the payment was not in the nature of salary or for professional services, citing a case law to support their position. The CIT(A) upheld the disallowance, stating that the payment was not exempt from TDS. The appellant further contended that the remuneration to Directors should not be considered as salary, especially in the absence of an employee-employer relationship. They highlighted the enactment clarifying the withholding tax on managerial remuneration from 1.7.2012, emphasizing that the payment to Directors should not be subject to TDS under Section 194J. The Tribunal agreed with the appellant, ruling that Director's remuneration cannot be treated as salary if there is no employee-employer relationship. The Tribunal held that the payments to Directors, authorized by shareholders, should not be considered as salary and thus, the disallowance under Section 40(a)(ia) for the impugned Assessment Year was deleted.

The Tribunal's decision was based on the clarification in the statute that remuneration to Directors cannot be categorized as salary in the absence of an employee-employer relationship. The Tribunal emphasized that payments to Directors, approved by shareholders, should not be treated as salary or subject to TDS under Section 194J. The Tribunal noted that the appellant had claimed the payments as expenditure, and the Assessing Officer should not have questioned the nature of these payments under Chapter XVIIB. The Tribunal highlighted that the appellant did not deduct tax at source under Chapter XVIIB but claimed the payment under a different name, leading to disallowance under Section 40(a)(ia). The Tribunal considered the appellant's argument regarding the enactment from 1.7.2012, clarifying that certain payments should not be considered as salary for TDS purposes. Therefore, the Tribunal ruled in favor of the appellant, allowing the appeal and directing the deletion of the disallowance made under Section 40(a)(ia) for the impugned Assessment Year.