Start up director remuneration issue

When a director includes salary as "income" on an accrual basis (due basis) and pays taxes on it, but that salary is subsequently waived or written off by the company, the director is effectively left with tax paid on income that was never actually received.

Under the Income Tax Act, salary is taxable on a "due" or "receipt" basis, whichever is earlier. Since the director has already offered this amount to tax, the following steps are generally considered for rectifying the situation:

1. Revision of Income Tax Return (ITR)

If the time limit for filing a revised return under Section 139(5) has not expired (the deadline is generally 3 months before the end of the relevant assessment year or before the completion of the assessment, whichever is earlier), the director should file a revised ITR for the year in which the income was originally declared. By revising the return, the director can exclude the "due" salary that was never received, thereby claiming a refund of the excess tax paid.

2. Filing an Application for Condonation of Delay

If the time limit for a revised return has passed, the director may approach the jurisdictional Commissioner of Income Tax (CIT) under Section 119(2)(b) of the Income Tax Act. This section allows the Income Tax Department to condone delays in filing claims for refunds. The director would need to provide a genuine, hardship-based justification (such as the unforeseen financial impact of COVID-19 and the subsequent board resolution to write off the debt) to request permission to claim the refund for the tax paid on the unrealized income.

3. Rectification/Refund under Section 154

In some specific scenarios, if the tax demand or computation contains an apparent error of fact or law, an application for rectification under Section 154 might be attempted. However, this is typically for correcting errors in the processing of the return rather than changing the income head retrospectively, so this approach is less likely to be successful than a revised return or a petition for condonation of delay.

4. Accounting and Documentation

To substantiate the claim:

• Board Resolution: Ensure the company has a formal board resolution stating that the remuneration has been waived or written off and that the liability to pay the director has been extinguished.

• Revised Form 16: If the company had initially issued a Form 16 or filed a TDS return reflecting the salary, the company should ideally file a corrected TDS return (if possible) or at least provide documentation confirming the waiver of the salary.

Summary

Because the income was taxed on a "due" basis, the most direct path is to file a revised ITR if still within the statutory window. If the window has closed, you should consult with a Chartered Accountant to prepare a petition for condonation of delay under Section 119(2)(b), documenting the board resolution and the financial circumstances that led to the write-off.