The Cochin Bench of the Income Tax Appellate Tribunal (ITAT) has held that remuneration paid by a private coaching institute to its teaching faculty engaged as independent professionals is liable for tax deduction at source (TDS) under Section 194J of the Income Tax Act, 1961, and not under Section 192 applicable to salaries.
The bench of Prashant Maharishi (Vice – President) and Soundararajan K. (Judicial Member) set aside the order treating the institute as an assessee in default and deleted the TDS demand of ₹9.48 lakh.
The appellant/assessee is a coaching institute based in Kerala imparting coaching for competitive examinations such as NEET, JEE and GATE, against the order of the Commissioner of Income Tax (Appeals), which had affirmed the action of the Income Tax Officer (TDS). The Revenue had held that the institute had wrongly deducted TDS under Section 194J instead of Section 192 on payments made to faculty members.
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The dispute originated from a survey conducted under Section 133A(2A) in December 2023 to verify TDS compliance. During the survey, the Department concluded that the faculty members were employees of the institute and therefore tax ought to have been deducted as salary under Section 192. On this basis, the Assessing Officer raised a demand comprising ₹7.65 lakh towards short deduction of tax and ₹1.83 lakh as interest under Section 201(1A), aggregating to ₹9.48 lakh.
The Department relied upon several factors to contend that an employer-employee relationship existed. It noted that faculty members were recruited through interviews, were required to maintain attendance, followed fixed working hours, informed the management before taking leave, were restricted from teaching at competing coaching institutes, and were generally granted annual increments.
The Assessing Officer also relied on statements recorded from faculty members during the survey and concluded that the institute exercised sufficient control and supervision over them, making the payments taxable as salary under Section 192.
The coaching institute argued that the faculty members were independent professionals engaged on an hourly basis for rendering specialised teaching services. It pointed out that there were no appointment letters, no written employment contracts, no provident fund, gratuity, ESI or other statutory employment benefits.
The assessee further submitted that the teachers themselves had consistently disclosed the receipts as professional income, claimed benefits under Section 44ADA, and the Revenue had accepted those returns without objection. It also argued that administrative requirements such as attendance registers or leave intimation could not by themselves establish an employer-employee relationship.
The Tribunal observed that the central issue was whether the relationship between the institute and the teachers was one of “contract of service” (employment) or “contract for service” (professional engagement).
After examining the factual matrix, the Bench recorded several significant features the faculty members were treated as consultants or visiting teachers. Remuneration consisted of professional fees with variable components. They were not entitled to statutory employment benefits such as provident fund, gratuity, bonus, leave encashment or medical reimbursement. There was no written employment contract. The institute did not interfere with the teachers’ professional discretion regarding the manner of teaching, although administrative regulations existed for smooth functioning of the institution.
The Tribunal held that administrative controls relating to attendance, timings or discipline are common in organised institutions and do not automatically establish a master-servant relationship.
The Bench placed substantial reliance on the Madras High Court’s decision in Dr. Mathew Cherian v. Assistant Commissioner of Income Tax, where consultant doctors were held to be independent professionals despite being subject to hospital regulations. The High Court had observed that what is crucial is whether the professional exercises independent judgment in performing professional duties without interference from the institution.
The Tribunal also referred to the Supreme Court’s judgment in Sushilaben Indravadan Gandhi v. New India Assurance Co. Ltd., which explained the distinction between a contract for service and a contract of service, emphasizing that the intention of the parties, degree of professional independence and absence of employment benefits are decisive considerations.
Further support was drawn from several decisions involving consultant doctors, including Escorts, Apollo Hospital International Ltd., Grant Medical Foundation, IVY Health and Life Sciences, Manipal Health Systems, and Yashoda Super Speciality Hospital, where courts consistently held that professionals rendering specialised services are not necessarily employees merely because institutions prescribe administrative regulations.
An important circumstance noted by the Tribunal was that the recipient teachers had filed their income tax returns by declaring the receipts as professional income under Section 44ADA, and those returns had been accepted by the Department. This strengthened the assessee’s case that the relationship was professional rather than one of employment.
The Tribunal concluded that the coaching institute had correctly deducted TDS under Section 194J on payments made to its faculty members. The existence of attendance requirements, fixed timings or restrictions on teaching elsewhere were held to be administrative measures necessary for efficient functioning and insufficient to convert the relationship into one of employment.
Accordingly, the ITAT allowed the appeal, holding that the institute could not be treated as an assessee in default under Section 201(1), and the demand of ₹9.48 lakh was liable to be deleted.
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