The Income Tax Appellate Tribunal (ITAT), Cochin Bench, has held that payments made by a private coaching institute to its faculty members were liable for TDS under Section 194J as professional fees and not under Section 192 as salary. 

The bench of Prashant Maharishi (Vice – President) and Soundararajan K. (Judicial Member) has set aside the orders treating the institute as an assessee in default under Sections 201(1) and 201(1A) of the Income Tax Act, 1961.

The appellant/assessee challenged the order of the Commissioner of Income Tax (Appeals), which had upheld the demand raised by the Income Tax Officer (TDS) for alleged short deduction of tax at source on payments made to faculty members.

The dispute arose after the Income Tax Department conducted a survey under Section 133A(2A) at the coaching institute’s premises in December 2023 to verify TDS compliance. During the survey, the Department observed that the institute had deducted tax under Section 194J on payments made to faculty members by treating them as independent professionals rather than employees.

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The Assessing Officer concluded that the teachers were, in substance, employees because they were recruited through interviews, worked fixed hours, maintained attendance, were restricted from teaching elsewhere, and were subject to administrative controls such as leave approval and annual increments. Based on these factors, the Department held that TDS ought to have been deducted under Section 192 applicable to salaries.

Accordingly, the Assessing Officer raised a demand of ₹7.65 lakh towards short deduction of tax and ₹1.83 lakh as interest under Section 201(1A), aggregating to ₹9.48 lakh.

The coaching institute argued that its faculty members were engaged as independent professionals on an hourly basis for imparting specialised coaching for competitive examinations such as NEET, JEE and GATE.

It contended that no appointment letters or employment contracts existed. Faculty members were not entitled to provident fund, gratuity, ESI, leave encashment or other statutory employment benefits. Payments were made as professional fees. Faculty members themselves had disclosed the receipts as professional income in their income tax returns and claimed the benefit of Section 44ADA. Administrative requirements such as attendance registers and leave intimation were only operational measures necessary for efficient functioning and did not establish an employer-employee relationship.

After examining the facts, the Tribunal observed that several features indicated an independent professional relationship rather than employment.

Among the significant factors noted by the Tribunal were faculty members were described as consultants or visiting teachers. Payments consisted of fixed remuneration along with variable components linked to lectures delivered. No statutory employment benefits such as PF, gratuity, bonus or insurance were available. There was no written employment contract. Teachers retained complete independence in the manner of imparting education, subject only to the curriculum. Administrative controls regarding attendance and scheduling were necessary for institutional discipline but did not amount to control over professional functions.

The Tribunal extensively relied upon the decision of the Madras High Court in Dr. Mathew Cherian v. Assistant Commissioner of Income Tax, where it was held that administrative supervision and organisational regulations do not automatically establish a master-servant relationship when professionals independently discharge their specialised duties.

The Tribunal also referred to several High Court decisions involving consultant doctors, including judgments of the Madras, Karnataka, Gujarat, Punjab & Haryana, Bombay and Andhra Pradesh High Courts, which consistently recognised that professionals working under institutional guidelines could nevertheless remain independent consultants where professional autonomy remained intact.

According to the Tribunal, the decisive factor is not administrative regulation but whether the institution exercises control over the manner in which professional services are rendered.

An important aspect noticed by the Tribunal was that all the faculty members had filed their individual income tax returns treating the receipts as professional income under Section 44ADA, and the Revenue had accepted those returns.

The Tribunal observed that this circumstance strongly supported the assessee’s contention that the payments were professional receipts rather than salary.

The Tribunal reiterated the distinction between a “contract of service” and a “contract for service.” It observed that while institutions may impose administrative regulations relating to attendance, timings or discipline, such requirements by themselves do not create an employer-employee relationship where professionals independently exercise their specialised skills without interference.

Holding that the relationship between the coaching institute and its faculty members was one of professional engagement and not employment, the ITAT concluded that the assessee had correctly deducted tax under Section 194J.

The Tribunal allowed the appeal and set aside the orders passed under Sections 201(1) and 201(1A), by deleting the TDS demand raised against the coaching institute.

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