Payment of Sitting Fees to Directors – Whether tax is deductible at source?
INTRODUCTION
One is often confronted with the question whether there should be deduction of tax at source against payment made by way of sitting fees to directors for attending meetings of the board and the committees constituted by it. The day before the Finance Bill, 2012 was presented in the parliament of India by Hon’ble Finance Minister Pranab Mukharji there was an ambiguity regarding the applicability of TDS provisions on the payment of sitting fees to the directors, that whether TDS is required to be deducted under section 192 or under section 194J of the Income Tax Act, 1961 or no TDS itself. But it seems that the above ambiguity has been resolved by the Finance Bill, 2012 with an introduction of clause (ba ) to sub section (1) of the Section 194J effective from 1st July, 2012.
SIGNIFICANCE
OF THE ISSUE
The above issue is gaining significance in the current scenario when large corporations in india are paying substantial sum of money to their directors for attending meetings of
their board and also those of the committees constituted in lines with the twin
requirement of the Companies Act, 1956 and clause 49 of the Listing Agreement
with stock exchanges relating to corporate governance.
Today , as per rule 10B in the Companies ( Central Government’s ) General Rules and Forms, 1956 corresponding to section 310 of the Companies Act, 1956 made effective by
notification dated 24-07-2003, sitting fee payable by a company having an aggregate
net worth at least Rs. 10 Crores or turnover at least Rs.50 Crores can be as high as
Rs. 20,000 per meeting for a director.
Central Government permission
has to be obtained , in case more amount is paid by way of sitting fees.
WHO
ARE ELIGIBLE FOR SITTING FEES ?
It is pertinent to
note that section 309(2) of the Companies Act, 1956 contemplates payment to a
‘Director’ of remuneration by way of a
fee for attending meetings of the board or committees constituted by the board.
The term director is inclusively defined by section 2(13) of the Companies Act, 1956 to include any person occupying the position of director by whatever name
called. The definition of the term ‘Managing Director’
is provided by section 2(26) of the companies Act, 1956. What distinguish
managing director from a director in terms of the definition is that managing
director is entrusted with substantial
powers of the management. Department Letter No. 3/1/90 CL-V, dated 18-07-1990 makes it very clear that sitting fee
may be paid only to a director who is
not whole time director or a managing director. i.e. sitting fees may be paid
to a non-executive director only.
SITTING
FEE IS REMUNERATION ?
Section198(2) of the Companies Act, 1956 clarifies that for the purpose of determining
the overall maximum managerial
remuneration, sitting fees payable to directors shall not be considered. However, section 309(2) of the Companies Act, 1956 expressly provides that a director may receive
remuneration by way of a fees for attending meetings of the board and
committees constituted by the board. Apart from these both sections of the Companies Act 1956 , Department Letter No. 3/1/90 CL-V, dated 18-07-1990 clearly says sitting fee may be paid only to a director who is not whole time director or a managing director.
Above makes it very clear that if sitting fees is paid to managing director or whole
time director then it will be considered only as payment of remuneration to the
directors.
IS
TDS DEDUCTIBLE AGAINST PAYMENT OF SITTING FEE ?
Position Under section 192 of the Income Tax Act, 1961
Section 192 deals with deduction to be made by an employer against salary paid
to employees. Now, first question comes to mind is whether sitting fee paid to
director does constitute part of salary income. Assuming but not admitting
sitting fee paid to director constitute part of salary income, then second
question comes to mind is whether non-executive director is an employee of the
company ?
It
is very clear provision of the law for taxing any income under the head
"Salaries" there must be existance of the relationship of an employer-employee as ruled in CIT v. Lakshmipati
Singhania [1973]
92 ITR 598 (All).
The Supreme Court in Ram Prashad v. CIT1972]
86 ITR 122 laid down a number of tests for determination of the employer-employee relationship. Moreover, company's directors are not servant of the company, but agents asmuch
as the company cannot act in its own person, but has only to act through
directors. it makes the directors to have the relationship of agents with the
company.The
Orissa HC in CIT v. Smt. Shanti Devi has held that where a person
holds the office of a director of a company, the remuneration by virtue of that
office does not bring about the relationship of a master and servant.
From
the above case laws, it becomes clear that a non-executive director cannot be
considered as an employee or servant of the company. The sitting fees paid to
him cannot, therefore, form a part of salary income warranting deduction of tax
at source under section 192 of the Income Tax Act, 1961.
Position
under section 194J of the Income Tax Act, 1961-
Next
question that have to be considered is whether sitting fees paid to director
can be considered as a fee for discharging professional services.
Since the services rendered by
non-executive directors to the company may be considered as managerial services
and, hence, covered by the provisions of sec. 194J, read with the Explanation to sec. 9(1)(vii) of the Income Tax Act, 1961. It is said that the person holding the
position of a company director must possess intellectual or professional
skills. Clause 49 of the Listing
Agreement calls for all the members of the Audit Committee to be financially
literate in the sense of having the ability to read, to understand and to
analyze the basic financial statements of the company. Thus, the sitting fees
paid to the Directors is covered by sec. 194J of the I.T. Act, 1961.
I'm here to share my testimony of what a good trusted loan company did for me. My name is Nikita Tanya, from Russian and I’m a lovely mother of 3 kids I lost my funds on trying to get a loan it was so hard for me and my children, I went online to seek for a loan assistance all hope was lost until one faithful day when I met this friend of mine who recently secured a loan from a very honest man Mr, Benjamin. She introduced me to this honest loan officer Mr, Benjamin who helped me get a loan in within 5 working days, I will forever be grateful to Mr Benjamin, for helping me get back on feet again. You can contact Mr Benjamin via email: 247officedept@gmail.com they do not know I’m doing this for them, but i just have to do it because a lot of people are out there who are in need of a loan assistance please come to this honest man and you can be save as well .WhatsApp:(+1 989-394-3740)
ReplyDelete