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Tax Implications for Directors: Understanding the Applicability of Section 44ADA

The role of a director has traditionally been restricted to a close club of individuals answering to a well-defined criterion that kept a whole host competent persons out. However, with the compulsion to have ‘independent directors’ on boards, the universe of persons being appointed has enlarged significantly. The remuneration attached to this position has also changed with the times and persons who are directors in multiple entities have bulging pockets from fees and commission.

The Finance Act,2016 introduced a new section to simplify the taxation of professionals whose income from specified professions is less than Rs 50lacs. The object is to adopt a presumptive approach to taxation to lighten the burden of both the taxpayers and the tax authorities. Section 194J is the provision under which the companies that pay the remuneration deduct tax. Directors would be entitled to offer their remuneration whether as sitting fees or commission as income from profession.

The question is whether the dispensation as provided under section 44ADA would apply to such cases where the total income is less than Rs50lacs specified therein. Section 44ADA is applicable only to such professions as specified therein. Board positions like that of a director are not one of those. However, a director may have the requisite qualification to fit into one of the professions specified.

The point becomes moot when the person concerned is not actively in practice but only holding board positions. However, a person active in profession with a requisite certificate of practice may be able to put forth the contention that the board remuneration together with the remuneration from actual accounting practice should be considered for the applicability of sec 44ADA.

Another way to examine this issue is the parity between the treatment for directors with different qualifications. A chartered accountant or lawyer or a company secretary automatically qualifies under this provision. However, a management expert or a retired bureaucrat without the said qualification would not. In such a case even among directors as a class there would be divergence in the treatment of the same income.

Another aspect is that the section was introduced to smoothen expense claims for small professionals. A directorship simpliciter necessitates little relevant expenses in the exercise of the office. In practice every possible expense attributable to holding such a position is not available.


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