Independent Directors (ID) have enough on their plate to deal with inside the boardrooms. June/July are months when they are confronted with off-Board matters as well. It is return of income filing time and arriving at the correct income to pay tax is the main activity in an otherwise lean Board meeting season. The central issue facing Directors are how and where do they classify the sitting fees and commissions received from various companies. Should they be categorised as “Professional income “ or “Income from other sources”?

In the years gone by, professionals like lawyers and chartered accountants sitting on the Boards of various companies were having their own professional income. Even at that time there was haziness on how to treat sitting fees. The decision was based more on individual facts than the provisions of law. Post 2013, the bar was raised on the role of Independent Directors as well as the time they spent on the discharge of functions.

The demands of the regulators — RBI, SEBI and NFRA — have increased manifold and “professional expertise” is now a prerequisite even before getting appointed, not to mention the extent of preparation. Why then is this stream of income called “Other Sources” is a question that begs a clear answer.

A dipstick survey across the country and among various IDs has thrown up three distinct approaches: (i) Income from other sources paying full tax and no expenses claimed as deduction; (ii) Professional income with some actual expenses claimed as deduction; and (iii) Professional income with 50 per cent flat deduction claimed on presumptive basis. In effect there is no clarity and consistency and it appears that in most cases it is categorised as “Other Sources”.

Most IDs would be senior citizens and not required to pay advance tax if this stream is categorised as “Other sources”. If taken as “Professional income”, then advance tax is payable in four instalments but they could claim legitimate expenses as deduction. In effect it is a trade-off between the tax savings on expenses claimed and remitting advance tax versus paying tax in one shot at the time of filing return of income and no expenses being claimed.

Optics and logic

A retired professional who has taken up ID role as a career gets sitting fees and commission as main source of income. How can these ever be called ‘Other Sources’? Regulation 18(1)(c) of Listing Obligations and Disclosure Requirements (LODR) dealing with audit committee members lists out attributes that point out directionally to expertise and financial literacy, all bordering around professional acumen.

The withholding tax provision under Section 194J of the Income Tax Act requires deduction of tax at 10 per cent under the category ‘Fees for technical and professional services’, notwithstanding that there is a separate entry in that section for sitting fees. Further, under the GST regime and by Notification No 13/17, services supplied by a director of a company or a body corporate to the said company or the body corporate is liable for GST on reverse charge basis. The reference to services here has to be ‘Professional services’ — that is, sitting fees and commissions.

It is urged that the CBDT first clarifies the position that this source of income is “Professional income”. If need be an amendment to the law in the forthcoming Budget can seal the matter beyond any doubt. An item of income should fall under “Other Sources “ only if it cannot be fitted into a specific head of income. In view of the arguments advanced above there is no doubt that it should fall under “Professional income”. As a fallout, legitimate expenses may be duly claimed, subject of course to demonstrating evidence and supporting documents, to earn the said income. If a 50 per cent flat deduction is seen as too high via the presumptive route, this can be reduced to, say, 30 per cent. Let the Directors be spared of the effort of keeping records to claim expenses.

Most importantly, by changing the status from “Other sources” to “Professional income”, parity is also restored with other connected reference points. Senior citizen IDs can then focus on the main job on hand — enhance the quality of corporate governance by rendering a professional job rather than worry about where to categorise this source of income for tax purposes.

The writer is a chartered accountant