Directors remuneration – applicability of section 192 and / or S.194J – need to recheck and decide again proper section of TDS in view of amendment w.e.f. 01.07.12.

[C.A. DEV KUMAR KOTHARI]

Relevant links:

Section 15,16,17, 192 and 194J of the Income-tax Act, 1961.

Amendment of S.194J:

Section 194J has been amended w.e.f. 01.07.2012 by insertion of the following  new sub-clause  (ba) in sub-section (1)  by the Finance Act, 2012:

        (ba)  any remuneration or fees or commission by whatever name called, other than those on which tax is deductible under section 192, to a director of a company; or

An analysis:

This clause will apply only in respect to any payment by a company to a director of the company and not in any other cases.

This will not apply in cases where tax is deductible under section 192.

Section 192 apply for tax deduction at source when the income is taxable under the head “salaries”.

Therefore where S. 192 is attracted and tax is deductible under that section, then  section 194J will not apply. As discussed in detail afterwards, we find that for chargeability of an income under the ehad salaries to which section 192 apply , it is necessary that the person who pays salary or other remuneration  or who provide perquisites is an employer of assessee. Therefore, the relationship of employer and employee is necessary

Section 192:

Relevant part of section 192 which determine the nature of income from which tax is deductible under section 192 is reproduced below:

    192. (1) Any person responsible for paying any income chargeable under the head "Salaries" shall, at the time of payment, deduct income-tax  on the amount payable at the average rate of income-tax  computed on the basis of the rates in force for the financial year in which the payment is made, on the estimated income of the assessee under this head for that financial year.

Chargeable under the head “Salaries”:

To examine what is chargeable under the head salaries we need to have a look on section 15-17. Section 15 is charging section and it reads as follows:

Salaries.

15. The following income shall be chargeable to income-tax under the head "Salaries"—

(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.

 [Explanation 1].—For the removal of doubts, it is hereby declared that where any salary paid in advance is included in the total income of any person for any previous year it shall not be included again in the total income of the person when the salary becomes due.

 [Explanation 2.—Any salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from the firm shall not be regarded as "salary" for the purposes of this section.]

Old appointments:

In case of old appointments of directors and payment of remuneration where it is established that the payment made or perquisites allowed are chargeable under the head salaries and tax deduction and assessment has been made under the head salaries, it can be said that it is settled that the remuneration is chargeable under the head salaries. Therefore, employer can continue to deduct tax at source under section 192. However, it would be advisable to recheck the terms and conditions and relationship to reassure that tax is deductible under section 192.  

New appointments and arrangements:  

In case of new appointments and arrangements with directors care should be taken to examine relationship of employer – employee. In case there is no such relationship, then tax need to be deducted at source u/s 194J.

Salary vis a vis professional income:

In case of directors where there is no relationship of employer and- employee and even in cases where particular director is engaged in occupation or profession of director of companies, the head of income “income from business or profession” can be more appropriate than the head “salaries”. In some cases remuneration received from a company may fall under the head ‘salaries’, whereas remuneration received from other company may fall under the head ‘income from business or profession’.  Therefore, depending on facts and circumstances of cases of relationship, nature of payments and provisions of perquisites or facilities the  section for deduction of tax should be decided.

Where regular payments are made and perquisites are provided and the director is regularly responsible to the Board of Directors  the head ‘salaries’ will be more appropriate, whereas in case of  sitting fees, annual remuneration, commission etc.  casual or as and when required functioning situation the head professional income can be appropriate.             

In such cases comparative study of applicable benefits, advantages and disadvantages can be made in relation to two heads of income and after considering all facts and circumstances, including future plans a better mix of composition of directors remuneration from all companies can be adopted to take advantages of maximum benefit.                  

Salary also has wider scope:

A look on provisions of section 17 suggests that salary has also wider scope, and can include direct and indirect payment, benefits, recurring and non recurring payment , perquisites, etc. However,  salary head is subject to relationship of employer and employee.