Background
Taxation for Salaried Individual is completely different from Taxation under the head “Profits and Gains from Business and Profession”. When any income is taxable under the head “Income from Salaries” only few allowances like House Rent Allowances and Standard Deduction are allowed against the salary income. Allowances u/s. 10(14) are also allowed against salary income but in some specific cases only.
It May be further noted that these allowances will not be allowed when the persons opts for new taxation regime referred to in section 115BAC of Income Tax Act.
However, if the income is taxable under the head “Profits and Gains from Business and Profession”, assessee can claim any sum of money incurred to earn the income. It is to be noted that assessee can claim these expenditure irrespective of the fact that whether he opts for new regime or not u/s. 115BAC.
Further in case of professional services, Section 44AD of the Act which deal with Presumptive Taxation and provides that 50% of the gross receipts shall be treated as Income of the assessee and will be taxed accordingly.
Therefore, it is very important to know when any professional fees provided by any individual will be treated as income from salary or as business income because tax payable can be differ by huge margins in both the cases.
In some cases, employee may even enter into professional services agreement with organizations to reduce the taxability, however in substance they are in employment with that organization.
Further in Today’s time, many IT, finance professional work on remote basis with organization situated globally. It is very essential to determine the nature of agreement between these professional and the organization with they work. It need to be determined whether the services are offered as freelancer basis as Independent professional or they are offered in course of the employment to ensure correct taxability.
Below Article will summarize when the income will be taxable under these head on the basis of conflicting Judgements.
When Income is taxable under “Income from Salaries”
For charging any income under the head “Income from Salaries” there must be employer-employee relationship between the payer and the payee. This is different from professional services as there exist Principal-Agent relationship in case of Independent Professional services.
An Employee is a person who works under the direct control and supervision of the employer.
If there is no employer-employee relationship, income can be treated as Professional fees.
Red Chillies Entertainment Pvt Ltd vs ACIT (TDS) [ITA no 6655/Mum/2014] – ITAT Mumbai
In the present case, the tribunal has ruled in favor of revenue and treated the nature of relationship as Employer-Employee and the remuneration paid as salary. Tribunal made below observations while treating the remuneration as the Salary.
- Contract of employment provides that Mr. X will be appointed as “Production Manager” and will perform all duties as may be assigned from time to time.
- Tribunal noted that in case of professionals engaged on independent basis, assignments and duties are specified in advance.
- The independent professionals are engaged in specific assignments / jobs whereas employees are assigned with the duties which are not feasible to be defined in specific terms in advance.
- The remuneration has been fixed @ Rs.60,000/- per month. There is no variation clause or escalation clause indicating that remuneration shall be increased or decreased depending upon the quantum of work. Thus, it indicates that the remuneration has been fixed keeping in view the relationship of an employee and employer.
- Mr X was also provided with the Car and mobile from the employer. This indicates that Mr X was engaged on full time basis by the company.
- Tribunal has not agreed with the argument put by the assessee company that No Provident Fund, Bonus are paid to Mr X therefore, there exist no Employer- Employee relationship.
- Tribunal noted that payment of PF, Bonus, Gratuity are an important ingredient for the existence of Employer- Employee relationship but not an conclusive or only indicator.
- Therefore, the Tribunal dismiss this ground of the assessee and treated the relationship in nature of Employer-Employee Relationship.
Jayram Rangan vs ACIT [1770/Chny/2019] (ITAT Chennai)
Chennai Tribunal in case of Jayram Rangan vs ACIT (cited supra) delivered the conflicting judgement in favour of assessee and treated the relationship as Principal-Agent.
Facts of the case
Assessee derives consultancy income from M/s. Fichtner Consulting Engineers P.Ltd. and sitting fees from M/s. Consolidated Construction Consortium Ltd. The assessee has treated consultancy fees and sitting fees received from two companies as his professional income and claimed various expenses against professional income.
However the Assessing Officer did not accept claim of the assessee and observed that service agreement between the assessee and the company, is in the nature of employer and employee agreement for appointing a person for carrying out day to day management of the company. The Assessing Officer further noted that as per agreement between the parties, the assessee shall be designated as Managing Director and further, he was in-charge of overall operations of the company.
Therefore the assessing officer has treated the gross receipts as Salary Income and determine the tax accordingly.
Observations of Tribunal
Tribunal Observed that:
- There is agreement between the assessee and company for rendering professional services. As per the agreement between the parties, the assessee has been engaged as a professional on payment of professional fee which shall be payable in monthly equated instalments.
- Assessee has raised professional bills along with service tax for every month and the company has paid professional charges after deducting applicable TDS u/s. 194J of Income Tax Act, 1961.
- Assessee has maintained regular books of account and get his books of accounts audited u/s.44AB of Act
- Only objection of the Assessing Officer to treat professional income received from the company under the head ‘income from salary’ is nature of services rendered by the assessee to the company.
Order of Tribunal
Tribunal order that
- there is no restriction under law for appointing consultant / professional as managing director of the company and to entrust day to day affairs of the company.
- By profession, if assessee is competent enough to discharge his function, then the company may appoint any person to suitable post.
- Merely for the reason that the assessee had been designated as managing director, it cannot be said that professional fee received by the assessee for rendering professional services cannot be treated as salary, which is derived from employer and employee relationship.
Tribunal held that assessee is engaged for rendering professional services in the company and same has been rightly considered for taxation as professional income.
Conclusion
Taxability of the Income as Salary Income or as Professional Fees will depends upon the nature of relationship and whether the person work under the direct control and supervision of other person. These are subjective matter and depends upon case to cases.
Note- In case remuneration paid to director is treated as Professional Income and Tax is deducted u/s. 194J, there will be additional compliances on the Company. Company will be required to pay the tax under Goods and Services Tax on reverse charge basis.
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Disclaimer: The article is the comprehensive analysis of decision of various appellate forums on what constitute employer-employee relationship. This should not constitute any legal or professional advice in any manner whatsoever.
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