2016 (1) TMI 617 - AT - Income Tax

TDS u/s 194J - non deduction of tds - whether the remuneration paid to the director Mr. K. S. Kalyansundaram is liable to be taxed in view of provision contended u/s. 192(1) or is liable to be taxed in view of the provision contended in section 194J ? - Held that - In view of the terms and conditions of the contract of Mr. K. S. Kalyansundaram, it is apparent that he is not regular employee of the company. There is nothing on record to which it can be assumed that Mr. K. S. Kalyansundaram can be considered as permanent/regular employee of the company. No P.P.F/C.P.F. has been deducted. There is no regular increase of salary. There is no other benefits on record which was being paid to him as regular employee. No doubt, in the said circumstance when Mr. K. S. Kalyansundaram has been professionally being paid for his technical services therefore, provisions u/s. 194J would be quite applicable to his case, whereas the provision u/s 192(1) along with interest u/s. 201(1)/201(1A) are not applicable in the case of the assessee. - Decided in favour of assessee

Summary

Issues:
1. Whether the remuneration paid to the director is liable to be taxed under section 192(1) or section 194J of the Income Tax Act, 1961.
2. Determination of the nature of the relationship between the assessee company and the director.
3. Applicability of TDS provisions under section 192 and section 194J based on the terms of the contract.
4. Justification for the deduction of tax at source by the assessee company.
5. Assessment of the director's status as a regular employee and the implications on tax liability.

Analysis:
1. The dispute revolved around the taxability of the remuneration paid to the director, with the assessee arguing for tax deduction under section 194J while the departmental representative contended it should be under section 192(1). The terms of the contract and the nature of the relationship were crucial in determining the appropriate tax treatment.

2. The terms of the contract highlighted the control, supervision, and exclusivity of work produced, indicating an employer-employee relationship. Despite the company treating the remuneration as professional fees in their accounts, the actual nature of the relationship prevailed in determining the tax liability, leading to the conclusion that the remuneration should be considered as salary subject to TDS under section 192.

3. The absence of regular employee benefits, deductions, or salary increments for the director supported the argument that he was not a regular employee. Consequently, the provisions under section 194J were deemed applicable based on the professional nature of the services rendered, thereby rejecting the application of section 192(1) and interest under section 201(1)/201(1A).

4. The appellate tribunal found the order unsustainable in law due to the misinterpretation of the relationship between the company and the director, leading to the acceptance of the appeals by the assessee. The case was remanded to the Assessing Officer for a fresh decision based on the tribunal's observations.

This judgment clarified the distinction between tax deductions under section 192(1) and section 194J based on the nature of the relationship between the parties, emphasizing the importance of contractual terms and the actual conduct of the parties in determining the appropriate tax treatment.