Allowability of Payment of Commission
This query is : Resolved
27 April 2010
Dear Friends,
A company has passed a special resolution to pay the commission to its non whole time directors as per the limits prescribed under Companies Act, 1956. However the Assessing Officer while doing the assessment has asked the assessee to show cause why the commission paid to its non whole time directors should not be disallowed. The AO has opined that whatever is given in the Companies Act, a deduction of expenses can not be allowed for that under the Income Tax Act.
The directors of the company are independent directors and are renowned person in their profession like CA, lawyer, banker, technocrat etc.
Members are requested to share their views on the allowability of commission paid to non whole time directors by the company along with relevant case law, notification, circular etc. which supports their view.
With best regards,
A company has passed a special resolution to pay the commission to its non whole time directors as per the limits prescribed under Companies Act, 1956. However the Assessing Officer while doing the assessment has asked the assessee to show cause why the commission paid to its non whole time directors should not be disallowed. The AO has opined that whatever is given in the Companies Act, a deduction of expenses can not be allowed for that under the Income Tax Act.
The directors of the company are independent directors and are renowned person in their profession like CA, lawyer, banker, technocrat etc.
Members are requested to share their views on the allowability of commission paid to non whole time directors by the company along with relevant case law, notification, circular etc. which supports their view.
With best regards,
29 April 2010
Hello Sir, in my opinion
Non Whole time Directors are also paid commission as a percentage of net profits and the law relating to provisions is contained in Section 309 (4) of the Companies Act.There are also limits up to which such commission can be made and the restrictive limits are 1 per cent or 3 per cent of the net profits depending on whether the company has a managing or a whole-time director.
The provisions of the Act dealing with TDS on commission is contained in Section 194H: Basically, the TDS is at 5 per cent on all payments categorised as commission or brokerage. For this purpose, commission or brokerage is an inclusive definition covering various types of payments made directly or indirectly by a person acting on behalf of another person for services rendered.
Is a director acting on behalf of somebody when he receives commission from the company? To answer this, the role of a director alone is critical. And on examining this, it is reasonably clear that he is not acting on behalf of another person. One may agree and say that directors act on behalf of shareholders who appoint them. But this would be a stretched interpretation to suit the definition given in Section 194H. They perform their roles and duties in accordance with the provisions of the Companies Act.
Most of the directors in today's corporate world are assessees. They anyway have permanent account numbers and file their returns at the respective places. While the legal position would be that Section 194J/194H may not be attracted on a strict interpretation of the wordings, the balance of convenience in corporate functioning is to deduct tax at source and remit the payment. This, no doubt, is an easy solution and can be effected even without examining the Act. But the failure to deduct tax at source owing to wrong interpretation leads to pecuniary loss to companies by way of interest, penalty, and so on. In an era of excessive compliance, most companies take the safer option of deducting tax at source whenever and wherever possible.
It is time that when circulars, pursuant to Annual Finance Acts, are issued on TDS, most of the common types of payments be clarified by the Central Board of Direct Taxes so that the views of the Government in this regard are unambiguous and clear
Non Whole time Directors are also paid commission as a percentage of net profits and the law relating to provisions is contained in Section 309 (4) of the Companies Act.There are also limits up to which such commission can be made and the restrictive limits are 1 per cent or 3 per cent of the net profits depending on whether the company has a managing or a whole-time director.
The provisions of the Act dealing with TDS on commission is contained in Section 194H: Basically, the TDS is at 5 per cent on all payments categorised as commission or brokerage. For this purpose, commission or brokerage is an inclusive definition covering various types of payments made directly or indirectly by a person acting on behalf of another person for services rendered.
Is a director acting on behalf of somebody when he receives commission from the company? To answer this, the role of a director alone is critical. And on examining this, it is reasonably clear that he is not acting on behalf of another person. One may agree and say that directors act on behalf of shareholders who appoint them. But this would be a stretched interpretation to suit the definition given in Section 194H. They perform their roles and duties in accordance with the provisions of the Companies Act.
Most of the directors in today's corporate world are assessees. They anyway have permanent account numbers and file their returns at the respective places. While the legal position would be that Section 194J/194H may not be attracted on a strict interpretation of the wordings, the balance of convenience in corporate functioning is to deduct tax at source and remit the payment. This, no doubt, is an easy solution and can be effected even without examining the Act. But the failure to deduct tax at source owing to wrong interpretation leads to pecuniary loss to companies by way of interest, penalty, and so on. In an era of excessive compliance, most companies take the safer option of deducting tax at source whenever and wherever possible.
It is time that when circulars, pursuant to Annual Finance Acts, are issued on TDS, most of the common types of payments be clarified by the Central Board of Direct Taxes so that the views of the Government in this regard are unambiguous and clear
29 April 2010
Dear, To put is simple any legal expenditure incurred for runnning the buiness is allowable. If the commission is paid in excess of limits laid down by Companies Act, still this can be deductble.
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