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A unique case: which itr form applies ?

Shanthi (Junior Student) (226 Points)

24 June 2015

Dear Sir/Madam

A person, Director of a PVT LTD company

AY2014-2015 filed using ITR 1 salaried, Director Salary from Company.

AY2015-2016

1) Company files NULL return, no profit, no loss, no business done. Company is still active.

2) The person still is the director of company and did not receive any salary whatsoever from the company.

3) The person using his freelance programming skills has earned income under profits and gains of business and profession.

Can anyone please let me know whether ITR 1 or ITR 4 is applicable for the person under the above case ?

Thanks a lot

Shanthi

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17 Replies

Z ( ) (2965 Points)
Replied 24 June 2015

ITR - 4 since the income is from profession.

Further salary income is also to be included even if no money has actually been received & irrespective of the fact that the Co. has also not considered salary as an expense and did not showed it as a loss.

The Co. should have rescined the contract for the services of the director.

S.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;

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Shanthi (Junior Student) (226 Points)
Replied 24 June 2015

Originally posted by : Z
	Further salary income is also to be included even if no money has actually been received & irrespective of the fact that the Co. has also not considered salary as an expense and did not showed it as a loss. The Co. should have rescined the contract for the services of the director. S.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;

This raises an important question indeed, so how much should be shown as director's salary since it is not mentioned anywhere in company documents about the quantum of the director's salary/remuneration at all.

Z ( ) (2965 Points)
Replied 24 June 2015

So you mean that there is no written contract for this?

No resolution?

Well it should be atleast as much as it was in previous period.

Co. should also show loss from such expenses in revised return

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Shanthi (Junior Student) (226 Points)
Replied 24 June 2015

Thanks for the clarification and answers.

There is no specific board resolution mentioning the exact director's remuneration.

The company is proposed for closure next FY.

In such a case suppose if the director pays tax for income NOT received from company and the company goes in for closure next year. What happens to the tax paid ? Can refund be applied for ?

Z ( ) (2965 Points)
Replied 24 June 2015

No, why should tax be refunded?

Its properly charged. Refund is available when you have paid excess tax or paid tax which you were not supposed to pay. Here director is liable to pay the tax

Let me share with you an interesting thing

we had similar provisions earlier also [Earlier means previous Income tax Act]

Indian Income Tax Act 1922

S.7(1) The tax shall be payable by an assessee under the head "Salaries" in respect of any salary or wages, any annuity, pension or gratuity, and any fees, commissions, perquisites or profits in lieu of, or in addition to, any salary or wages, which are allowed to him by or are due to him, whether paid or not,

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Rashi Bajaj (CA) (752 Points)
Replied 24 June 2015

I believe form ITR 4 would do. About salary, I have a further question when it comes to "whether paid or not". In my opinion, the above words were inserted to tax salary on accrual basis. But in the current scenario, the director has not rendered any service to the company, therefore no salary accrues to him. So why salary should be shown as taxable income when there is no Accrual of any amount?

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Z ( ) (2965 Points)
Replied 24 June 2015

44AD. (1) Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of an eligible assessee engaged in an eligible business.....

This applies in case of business but here the person is freelance programmer , a professional

Hence ITR 4S can not be used.

Further ,accrural of Salary has to be seen from the agreement between the employer and the employee.

[Salary was paid earlier this proves that there must be an agreement , though oral which is a valid agreement as per Indian Contract Act]

Whether the work was done or not is a different issue. Salary has accrued in my understanding

In case of CIT V ELI LILLY & Co India P Ltd SC

No work was done but yet it was held that tax should have been deducted u/s 192

[Although the salary was paid in that case]

Shanthi (Junior Student) (226 Points)
Replied 24 June 2015

Originally posted by : Z
	Further ,accrural of Salary has to be seen from the agreement between the employer and the employee. [Salary was paid earlier this proves that there must be an agreement , though oral which is a valid agreement as per Indian Contract Act] Whether the work was done or not is a different issue. Salary has accrued in my understanding In case of CIT V ELI LILLY & Co India P Ltd SC No work was done but yet it was held that tax should have been deducted u/s 192 [Although the salary was paid in that case]

Thanks for the answer. What if the company itself has NOT done any work at all during FY 2014-2015. There is no bank transaction during FY 2014-2015 and it is proposed to close the company during the next FY. Will it have any bearing in this case ?. So it is 100% sure that the director will NEVER receive his SALARY physically

Z ( ) (2965 Points)
Replied 24 June 2015

In my understanding ,No

But you may wait for other replies.

Rashi Bajaj (CA) (752 Points)
Replied 24 June 2015

My opinion was based uopn common logic: Say an employee avails leave(unpaid) of 3 months from his employer, then income would be charged to tax for 9 months only. It would be against the principal of natural justice to tax an income which is neither accrued nor received just on the basis of a contract. Even if there was a contract, there would definitely be a clause therein to provide that remuneration will be granted w.r.t. service provided only...

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Rashi Bajaj (CA) (752 Points)
Replied 24 June 2015

Nikhil Kaushik (Fellow CA) (85743 Points)
Replied 24 June 2015

well the common logic normally doesn't work in taxation! Director's salary is not based on services provided. It is not some professional fees that is based on provision of service. As long as you are a director and certain salary is agreed upon, the same accrues.

But the determining factor is not whether salary is paid or not..question is whether salary is accrued or not. Given that the companies are bound to follow accrual system and there is no specific resolution for director's salary, ideally you will end up with zero salary in the tax return.

On a side note, why was the original query unique??

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Ketan Kapoor (Audit) (124 Points)
Replied 25 June 2015

Do read. May be useful for everyone. It is an article giving tips for preparation of Income Tax returns.
https://www.businesslawsindia.com/2015/06/few-tips-for-preparation-of-income-tax.H T M L

Rashi Bajaj (CA) (752 Points)
Replied 25 June 2015

Ketan, the blog has probably withdrawn the post. the page asy, the article does not exist..

About the salary income, in the present year, since there is no accrual, you may not offer hypothetical income to tax. However, if at all in the future the salary expense is recognised by the company, i.e. salary accrues finally, offer it for tax as arrears of salary.

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