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TDS ON REMUNERATION PAID TO DIRECTORS u/s 194J(1)(ba) of INCOME TAX ACT,1961
Budget 2012 inserted a New clause 1(ba) in Section 194J which mandates TDS @10 % on any remuneration paid to Directors of a company. This clause will be effective from 1st July,2012.
The newly inserted clause (1)(ba) of 194J reads as under:
-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 shall liable to be deducted @10%.
Till the introduction of the above new clause, there is an ambiguity whether the tax is to be deducted at source on sitting fees and commission paid to directors or not. Now with the insertion of new clause (1)(ba) in Section 194 J, it clear that TDS has to be made from any remuneration or fees or commission paid to directors.
Readers may note that the newly inserted clause covers any remuneration paid whether by way of fees or commission or by any other name and such payments shall be subjected to TDA @10%.
It is useful to refer to provisions of the Companies Act relating directors remuneration. The relevant sections are 198, 269 and 309. A combined reading of Section 198 and 309 of the Companies Act,1956 reveal that directors remuneration includes payments made to Directors for services rendered in any other capacity. In other words salary paid to Managing director/whole time director, Commission, sitting fees paid to directors and any other fees paid for professional services shall be treated as remuneration under the Companies Act,1956. The same analogy may be applied to determine what constitutes directors remuneration for deducting Tax at source under Income tax act. However 194 J (1) (ba) indicates that if remuneration paid is covered under section 192, this clause is not applicable. If TDS is not made u/s 192, it has to be invariably covered under 194 J.
Readers may also note that prior to the insertion of proposed amendment, Section 194(J) refers to TDS on amounts paid for professional and technical services. By amendment TDS even sitting fees and commission paid have to be covered. By implication sitting fess and commission are bracketed under professional and technical Services.
Readers may note that while Services rendered in professional capacity will be taxed as professional/business income in the hands of Director, the sitting fees and commission paid will be taxed under the head “Income from other sources”. Thus this new section instead of covering only professional services, included within its ambit even the sitting fees, commission and any payment by whatever name called. This will create some doubt whether directors will be liable to pay service tax on aggregate of all types of payments mentioned u/s 194 J.
Some companies have been following the practice of deducting TDS. But with the introduction of clause 1(ba) in Section 194J, it becomes mandatory for all companies to deduct TDS @10% on sitting fees, commission paid to directors other than whole time directors and Managing directors. This amendment is welcome as TDS can now be effected on sitting fees, commission and any other payments made to Directors.
G S Rao, Chief Manager(Legal) OCL India Limited