Section 2(94) of the Companies Act provides that “whole-time director” includes a director in whole-time employment of the company. A whole-time director is an executive director. As per clause2(k)of Companies (Specification of definitions details) Rules, 2014, “Executive Director” means a whole-time director as defined in clause (94) of section 2 of the Act. The whole time director is also covered under the definition of “Key managerial person under section 2(51) (iv) of the Companies Act.
Generally speaking, a whole-time director has a dual capacity, and besides being a director, he is also an employee of the company and the principles. It was held in the case of Ramaben A Thanawala v. Jyoti Ltd. (1957) 27 Com Cas 105 (Bom.) by the Honourable High Court that the expression “whole-tine director” must refer to a director who spends his whole time in the management of the company.
The employer and employee relationship between the director and company may be created either by a service agreement or by the articles of association of the company. However, mere resolution of the Board of Directors allotting work and payment of remuneration is not sufficient without proving and establishing on record that services were rendered by the director as an employee. Merely holding the office of a director of a company and receiving remuneration does not bring about the relationship of employer and employee. This view is supported by the judgement in the case of CIT v. Shanti Devi (1993) 199 ITR 800 (Ori.)
From the definitions and provisions discussed above, it is clear that the director of a company enjoys a dual capacity. He might be a director as well as an employee, but that he is an employee must not be merely on paper, rather it should be proved and established on record as a fact.
Therefore, as per the definition of Whole-time Director and that of an executive director, both conditions should be satisfied to consider a person as whole-time director i.e., he is a director and a Whole Time Employee of the company.
Whether a whole Time Director be a Consultant to the Company
To proceed on this issue it is important to understand the difference between employment and profession. If the services rendered by the director are of professional nature and he is free to offer services to others, he cannot be considered to be in the employment of a company as the same is in his professional capacity. But if a director is appointed in employment by way of an agreement and complying the condition of the service agreement he would be considered to be in the employment of a company.
As per proviso to section 197(4) of the Companies Act, the remuneration to whole-time director paid in any other capacity shall not form part of the remuneration. The proviso provides that if a director renders professional services the remuneration paid for such services shall not be included to arrive at the maximum managerial remuneration in case of inadequacy of profits. This shows that the whole time director can render professional services. Further, remuneration to directors paid in his professional capacity shall not be included in the Nomination and Remuneration Committee is of the opinion that the director possesses the requisite qualification for the practice of the profession. Section 200 of the Companies Act 2013 to has a reference to the professional qualification in relation to managerial remuneration.
The Company can approach the Central Government for its approval/opinion with regard to the qualification of the director for the payment of remuneration in the professional consultant of the company. Once the Central Government gives its opinion that professional fee can be paid to the director as he is qualified for the same then the previous sanction of the Central Government is not necessary for paying remuneration to the director for the professional services as the same is excluded from the total remuneration under section 197.
Citations on Whole Time Director can be a Consultant
STUP CONSULTANTS LTD. v. UNION OF INDIA AND ANOTHER. (1987) 061 Comp Cas 0784 (DEL)
“In this view of the matter, this writ petition succeeds. The order dated January 14, 1983, in so far as it relates to non-expression of opinion regarding the professional qualifications of Shri Alimchandani is quashed, and it is declared that in view of the counter-affidavit filed by the respondents, Shri C. R. Alimchandani has to be treated as a person who has the requisite qualifications for the practice of the profession of a civil engineer, and petitioner is entitled to such opinion from the Central Government, which the respondent is directed to convey to the petitioner company within two months from today.”
SREE GAJANANA MOTOR TRANSPORT CO. LTD. AND ANOTHER v. UNION OF INDIA. (1992) 073 Comp Cas 0348 (KAR)
The decisions in Setup Consultants Ltd. v. Union of India  61 Comp Cas 784 (Delhi), Ruby Mills Ltd. v. Union of India  57 Comp Cas 193 (Bom) and R. Gac Electrodes Ltd. v. Union of India  52 Comp Cas 288 (Ker), on which learned counsel relied, support the submission made by him that the Central Government acted beyond its powers in fixing an upper limit of Rs. 7,000 per annum on the fee payable to a professional for services of a professional nature rendered by a director, while expressing its opinion that the director concerned possesses the requisite qualifications for the practice of the profession.
This petition, therefore, succeeds. In the result, I make the following order :
(i) Rule made absolute.
(ii) That part of the impugned communication certificate dated July 2, 1984, annexure D, which restricts the remuneration payable to the second petitioner for rendering professional services to the first petitioner-company, is quashed.
(iii) No costs.
Tax head under which the income is taxed under the Income Tax Act
The remuneration received as a whole-time director is treated as salary under the Income Tax Act and the same is taxed under the head Salary and the tax is deducted by the company under section 192 of the Income-tax Act. This so because as per proviso to section 197(4) of the Companies Act the remuneration to whole-time director paid in any other capacity shall not form part of the remuneration The director is eligible to claim a standard deduction of Rs.40000/- out of this salary if his age is less than 60 years that is if he is not a senior citizen. However, if the director is a senior citizen he is eligible for a standard deduction of Rs.50000/- from the income charged under the head salary. The professional income earned by the director is taxed under the head Income from Business and Profession and the TDS is deducted under section 194J1(ba). The tax in this section is deducted if any sum is paid in the form of any remuneration or fees other than those on which tax is deductible under section 192, to a director of a company.
The income chargeable under the head Business and profession could be declared u/s 44ADA. As per section 44ADA of the Income Tax Act if the gross receipts do not exceed fifty lakh the income chargeable for income tax purpose would be 50% of gross receipts. And if the director has earned profit which is less than 50% then he is liable to get his accounts audited.
If the director is qualified he can act as a consultant and is eligible to declare his income under the head salary which he has received as remuneration being a whole-time director and declare his income from consultancy under the head Profits from Business and profession.
GST on the remuneration paid to the director as a salary and as a professional fee
The remuneration paid to the executive director i.e., a whole-time director who is an employee of the company is not liable for GST. However, the remuneration paid to the whole time director against professional fee and the remuneration paid to non executive director is covered under the ambit of GST and the Company is liable to pay GST on the same under reverse charge mechanism as per Sr. No. 6 of Notification No. 13/2017 -CGST(Rate) dated 28.6.2017 . The relevant extract of the Notification is enumerated here-in-below:
This notification, notifies that on categories of supply of services mentioned in column (2) of the Table below, supplied by a person as specified in column (3) of the said Table, the whole of central tax leviable under section 9 of the said Central Goods and Services Tax Act, shall be paid on reverse charge basis by the recipient of such services as specified in column (4) of the Table below:
Category of Supply of Services
Supplier of service
Recipient of Service
Services supplied by a director of a company or a body corporate to the said company or the body corporate.
A director of a company or a body corporate
The company or a body corporate located in the taxable territory.
From the provisions of Companies Act, Income Tax Act and GST Law it could be seen that all the section speaks about role and taxability of director’s income. Different provisions support the view that the whole time director can be a consultant of the company and the company is liable for following the guidelines as provided under various laws for payment of remuneration to the director for his professional services.
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