RELATIONSHIP BETWEEN THE PRINCIPAL AND PROFESSIONAL – TREATMENT UNDER INCOME TAX PROVISIONS

[Mr. M. GOVINDARAJAN]

Many enterprises engaged professionals such as Engineers, Chartered Accountants, Company Secretary, Cost Accountant etc., for some sort of professional work, for which they used to get remuneration from the principal concerned.  The  question arises as to whether such professionals should be treated as employees of the Principal or as a contractor or consultant of the Principal for the purpose of tax deduction.  The employer is liable to deduct income tax of his employees from their salaries and liable to remit the same to the credit of the Government within the prescribed time and in the prescribed manner and also to file statement of tax deducted at source within the time limit specified by the Department.  The employer is to issue Form 16 showing the deductions of tax of the employee, to the employee concerned so as to enable him to file his income tax return.   If the professional is not an employee of the Principal and he is the consultant or retainer the remuneration given to the professional may not be treated as salary but it shall be considered as professional income in the hands of the professionals.  The Principal shall issue Form 16A for the tax deducted at source to the professional concerned.

In respect of employee, the employer is responsible to deduct all income tax payable by the employee and to remit the same to the credit of the Central Government.  But in case of professionals, the Principal is required to deduct 10% of the remuneration, if the remuneration exceeds ₹ 30,000/- in a financial year under Section 194J of the Income Tax Act, 1961.  The professional is to calculate the total income he received from this principal and also from other sources and pay the tax by him after deducting the tax by the Principal already.  The professional is to submit return of income indicating all the income received by him under various categories within the time stipulated.  Many disputes have been arised as to whether the remuneration received by the professional is whether salary or professional receipt.  In this article some case laws are discussed as below:

In ‘Piyare Lal Adishwar Lal V. Commissioner of Income Tax’ – 1960 (4) TMI 4 - SUPREME Court the Supreme Court held that the correct method of approach is whether having regard to the nature of the work there was due control and supervision by the employer.  The receipt of remuneration for holding an office does not necessarily gives rise to relationship of master and servant.  Whether a person is a servant or an agent would be determined by the duties of the employee, the nature of business, terms of his employment/engagement and the kind of supervisory control over his work.

In ‘Commissioner of Income Tax V. Manmohan Das’ – 1965 (11) TMI 33 - SUPREME Court while commenting on the profession, the Supreme Court held that the provision requires purely intellectual or manual skill.   In the opinion of Supreme Court, a profession will imply any vocation carried on by an individual or group of individual requiring the predominantly intellectual skills pursuing that vocation, requiring specialized advance education or expertise.  In this case it is an admitted fact that the assessee is professional having B.Tech degree and four years experience in advising, guiding and teaching various subjects relevant for preparation of entrance examination for engineering colleges.   The Assessing officer concluded that the agreement between the assessee and Resonance is a colorable device.  The Supreme Court held that the decision of Assessing Officer is not correct and not supported by any investigation or reasoning brought on record.

In this case the assessee was given freedom to take the classes and teach the subject within the parameter laid down by Resonance.  The day-to-day supervision and control is mission.  There is no provision for marking the attendance while coming to the Institute and going out of the Institute. No fixed timing has been given.   The consultancy agreement requires providing the consultant services for attracting the new teaching talent as well as for growing the young teachers and guiding of teachers of the Institute for delivery in classes.  The Supreme Court held that the agreement clearly shows that the relationship between the assessee and Resonance was not of employee and employer.    If the relationship between the assessee and the Institute was of employee and employer, then the length of contract would have been one year.  This also goes in favor of assessee to treat him as professional.  The Supreme Court further indicated that the consultancy agreement is not colorful device but only an admitted document and no material whatsoever has been brought on record to show that it is a colorful device.   No notice under Section 131 was issued to Resonance Institute to confront that the agreement is a colorful device.  The Supreme Court held that the assessee was a professional and not an employee of Resonance.

In ‘Arvind Singh V. Income Tax Officer’ – 2016 (7) TMI 266 - ITAT JAIPUR the assessee filed his return for the year under consideration on 29.09.2009 declaring total income of ₹ 9,69,450/-.  The Assessing Officer observed that during the year under consideration the assessee has derived income from working in the coaching Institute, M/s Resonance, Kota and M/s Bansal Classes Private Limited, Kota which are involved in providing coaching to the students for preparing the IIT examination.  The assessee was engaged in notes preparation for students, checking of note books, test paper etc., preparing test papers and handling daily practice problem and he took remuneration as professional receipts.

The assessee submitted an agreement with the Institutions in respect of his professional work.  He contended that the work mentioned in the agreement is not required to be done under salary.  He received TDS certificate in Form 16A, for his professional receipts.  The Assessing Officer compared the case of assessee with other Institutions.  He held that all the faculties of Allen Carrier Institute, Kota are doing the identical nature of work and they are showing remuneration as income from salary.  The Assessing Officer held that the total receipt is the income from salary.

Being aggrieved by the order the assessee filed appeal before the Commissioner of Income Tax (Appeals).  The Commissioner (Appeals) allowed the appeal partly by considering the comparable case of Shri Bharat Matoria.  He treated the income of the assessee as salary but he allowed deduction on account of expenses claimed by the assessee.

In the appeal before the Tribunal, the appellant contended the following-

• The assessee had made professional agreement with M/s Resonance, Kota and who had deducted TDS in Form No. 16A by treating the payment as professional receipts;
• There is no employer and employee relationship between the parties but both the authorities held this income under the head of salary, which is not justified;
• It is a contract for service and not a contract of service;
• The assessee is not entitled to statutory benefits like PF, ESI, gratuity, bonus or leave encashment;
• As per terms and conditions the assessee had the sole discretion to decide schedule of teaching hours;
• The assessee was discharging his duties as a consultant for the subject of maths,however, there is no restriction upon the appellant togive advice and consultancy services to other parties in respect of other subjects, which was not part of the agreement;
• The assessee paid ₹ 2,70,000 to the various computer operations, employed by him for assisting him and preparing notes for students, for which there was no reimbursement from M/s Resonance;
• There is no attendance and time decided by the Resonance in his case

Therefore he claimed that the receipts are professional payment.  The Revenue has vehemently supported the order of Commissioner (Appeals).

The Tribunal has gone through the terms and conditions of the agreement.  The assessee is a B.Tech from IIT, Guahati, who has expertise in maths and as per the agreement, he had provided professional service for the student of Resonance Institute, who provides coaching for preparation of IIT entrance test.  The assessee is provided lump sum receipts on the basis of contract for providing the services to the institutions.  The TDS deducted by the Resonance by treating these payments as professional and given TDS certificate in Form No.16A.  The assessee is free to do work with other institutions also.   He had employed various staff for preparing the material for the students on computer and also had staff for other purposes and incurred expenditure on them.  No PF, ESI and also no leave encashment was deducted.  The Tribunal held that the assessee’s receipts are professional and expenses claimed by the assessee are to be considered by the Assessing Officer.  The Tribunal, for the limited purpose set aside the issue to the Assessing Officer to verify the expenses and take decision as per law.

In ‘Commissioner of Income Tax V. Govindaswaminathan’ – 1998 (6) TMI 83 - MADRAS High Court the Madras High Court held that the retainer fee received by Advocate General is professional receipt.  The assessee had not, at any point of his professional career, exchanged his profession for service and he continues to be a professional person.  He received t he salary in his capacity as a professional person and it was properly assessed by t he Income-tax Officer under the head "Profession".

In ‘Deputy Commissioner of Income Tax, Delhi V. Artemis Medicare Service Limited’ – 2015 (5) TMI 931 - ITAT DELHI, the Tribunal held that the remuneration paid to the consultants by the hospital has been debited in the books as fees for professional services from year to year .The consultants have also accounted for the fees as income from profession. The consultants have consistently and regularly disclosed consultation fees in their income tax returns from year to year and paid tax accordingly. This indicates concurrence of intention and motive of both the parties to the agreement which is also reflected in their conduct and actions to form the relationship on principal to principal basis.

The fundamental aspect to be examined in deciding the relationship between the principal and professional is to see whether the contract between them is the ‘contract of services’ or ‘contract for services.  If the contract is for the ‘contract of services’, then it comes within the purview of the employee and employer relationship.  If it is for ‘contract for services’ then it is between the professional and entre then it is between the professional and principal.